ATO’S TOUGH LINE ON DIRECTORS
Amendments to tax laws designed to strengthen the directors penalty regime and protect employee superannuation entitlements, but what does this mean for trade credit providers?
The Tax laws Amendment (2012 Measures No. 2) Bill received Royal Assent on 29th June 2012 and is now in operation. Initially it appeared that the ATO was reluctant to exercise its new powers until the marketplace became aware of the consequences for non-compliance. It now seems that the transition period has ended, and the ATO is intent on using its new powers. The legislation reverses the ATO’s more lenient approach to arrears management for the years immediately post GFC, and exposes company directors to personal liability for all outstanding PAYG tax debt.
As a result, Credit Managers need to be aware that if their customers have not complied with their ATO lodgement requirements, then the directors’ personal assets are at risk. This impacts all credit providers where personal guarantees are sought. Non-lodgement of Business Activity Statements (BAS) with the ATO to prevent the tax liability being raised may well assist cash flow in the short term but it could come at great personal cost shortly thereafter and at the same time, increase the risk to unsecured creditors due to the ATO’s priority and access to privileged information.
On 24th April 2013, the Australian Financial Review published an article entitled “Directors on Notice as ATO Chases Debt”. This article states that the ATO has issued warning letters to any director of a company which has an outstanding PAYG or Superannuation debt. The issuance of the letter is considered to be a precursor to much harsher enforcement measures. The use of garnishee orders by the ATO has become more prevalent, and it appears that no debt is too small to attract the ATO’s attention. We have also been advised that during April 2013, the ATO may have issued its largest ever number of DPN’s and garnishee notices. When considered against the current political context, it’s not hard to see that the ATO is flexing its muscles, and has company directors in its sights.
An increase in cash flow pressure comes with a corresponding increase in corporate and personal insolvency, as the test of solvency, "the ability of a person to pay all their debts as and when they fall due and payable", is a cash flow test. Company directors will need to be more aware of their companies’ solvency status, their duties as directors, and the consequences of non-compliance with their obligations to the ATO.
The New Rules
Where a company’s PAYG liabilities remain unreported to the ATO for more than three (3) months after the due date, the ATO can make directors personally liable immediately, and the appointment of an Administrator or Liquidator to the company will no longer prevent directors becoming personally liable for the Company’s tax debt.
In the case of unreported Superannuation Guarantee Charge (SGC), where a company has not paid superannuation by the 28th day after the end of each quarter, it is required to lodge a Superannuation Guarantee Charge Statement by the 28th day of the following month. In circumstances where the Statement is not lodged on time, the ATO can now also make directors personally liable for outstanding superannuation by issuing a DPN. This includes making directors liable based on estimates of SGC owing, rather than on reported figures.
When combined with the effects of a multispeed economy and low consumer confidence, this Amendment will serve to put additional pressure on already struggling businesses.
Credit Managers will need to be mindful of whether or not their customers are up to date with their corporate tax obligations, and consider discussing this with their major accounts at the time of review, or earlier if warning signs emerge.
Early detection of a cash flow problem may indicate that ATO obligations are not up to date, and this should trigger a warning of the consequences to follow.