This could get ugly. For tax periods starting from 1 April 2020, the Commissioner will be able to pursue directors personally for their company’s outstanding GST liabilities.
A company’s GST ‘net amounts’ will be subject to the same director penalty notice (DPN) system that applies to PAYG withholding amounts and superannuation guarantee charge.
How does a director become personally liable for a company’s GST liability?
The DPN system will apply when a company must pay ‘an assessed net amount’ to the ATO by the due date for each tax period.
When that happens, each director has an obligation to do one of the following:
- cause the company to pay the assessed net amount to the ATO
- appoint an administrator
- start to have the company wound up.
If the due date passes, and none of these things has happened, each director is liable to a penalty – equal to the company’s unpaid amount.
What defences are available?
The director’s penalty is extinguished if either:
- the company pays the assessed net amount to the ATO
- an administrator is appointed or the company begins to be wound up – before the ‘lockdown’ date.
The penalty is ‘locked down’ to each director if the company fails to pay the assessed net amount and has failed to lodge its BAS within three months after the due date for the BAS. This means each director will continue to be personally liable for that amount.
There are defences that may apply where a director:
- is ill and because of that illness it was unreasonable for them to take part, and they did not take part, in the management of the company when they were a director
- takes all reasonable steps (or where there were no reasonable steps that could have been taken) to ensure that one of the following happens:
a. the company pays the assessed net amount
b. an administrator is appointed
c. the company is wound up.
You can read more about defending DPNs here.
There is also a specific defence for a penalty that relates to the superannuation guarantee charge and a GST assessed net amount. In these cases, directors will not be liable for a penalty if they take ‘reasonable care’ and have ‘reasonably arguable position’.
When could this get ugly?
The DPN system works well in encouraging companies to pay their liabilities on time, or be put into administration or wound up.
However, the volume of case law and ATO rulings shows that GST can be complicated. Interpreting the GST law correctly is a different matter to ensuring that a known GST liability is paid to the ATO on time.
Consider the following example.
Haibo Pty Ltd is a property developer. It acquires a property as a GST-free supply of a going concern. It develops the property and sells the subdivided lots to third party purchasers. Haibo Pty Ltd and each purchaser agree, in writing, that the GST margin scheme applies. Haibo Pty Ltd accounts for GST on the margin.
Two years after the last sale, the ATO conducts an audit. The ATO auditor identifies that, because Haibo Pty Ltd acquired the property as a GST-free supply of a going concern, it should have used the previous seller’s acquisition cost to calculate its margin for GST purposes. Haibo Pty Ltd and its advisers had never heard of the look-back rules. The ATO raises amended assessments.
Haibo Pty Ltd had an obligation to pay the assessed net amounts to the ATO for each relevant tax period by the due date for that tax period. As Haibo Pty Ltd did not calculate those amounts correctly, Haibo, as director, is personally liable to a penalty equal to the underpaid amounts.
Worse still for Haibo, the three month ‘lockdown’ period passed years ago. The company also has no ‘reasonably arguable position’ and did not take ‘reasonable care’ when the issue was inadvertently missed.
How can directors protect themselves?
There are two separate risks for directors and their companies.
- The first risk is paying the assessed net amount to the ATO by the relevant due date. This is easy to deal with: directors should ensure their companies pay their GST liabilities by the relevant due dates.
- The second risk is where there is a technical GST issue. Managing this risk comes in two parts:
a. proactively auditing GST positions to identify risks within the three month lockdown period
b. if a risk is identified, getting advice so that the company can show it has a ‘reasonably arguable position’ and has taken ‘reasonable care’ in self-assessing its GST position correctly.
‘Reasonably arguable position’ and ‘reasonable care’ are defined by the legislation and case law. ‘Reasonably arguable position’ does not mean ‘an arguable position’ – you have to look at the authorities to determine whether it is about as likely to be correct (or more likely to be correct) than the alternative position.
What should I do if I receive a DPN?
If you receive a DPN, you should get advice quickly. The ATO issues a DPN so that it can start collecting the debt against the director personally. It can commence recovery action against the director 21 days after the date the DPN is issued.