Under the old regime, if a director has received a Director Penalty Notice (“DPN”), he could avoid personal liability for the company’s tax debt by entering into an instalment payment arrangement with the ATO.
Under the new regime, entering into an instalment agreement will not remove the director’s obligations under the DPN. The only thing an instalment agreement will do is to preclude the Commissioner from commencing proceedings to enforce the obligation of the director’s penalty notice for the period while payments are made.
The new regime confirms that a DPN takes effect from the date when it is posted — NOT when it is received by the director (DCT v Meredith).
The notice period of the DPN under the new regime has been extended from 14 days to 21 days before recovery proceedings can be taken against the directors.
To avoid personal liability, the company must appoint a Liquidator or Voluntary Administrator within 21 days from the date of the notice.
The defence of “illness or other good reason” is made more difficult for a director to rely on. In addition to establishing the director was ill or for some other good reason did not participate in the management of the company at the time the relevant tax liability fell due, the director must now also establish that it would have been unreasonable to expect her or him to have taken part in the management of the company at that time. This fixes drafting problems with the existing provisions.
The Court has no power under section 1318 of the Corporations Act to grant relief to a director from their obligations in respect of a DPN. This confirms the existing law in DCT v Dick.
The ATO has no discretion to remit a DPN regardless of circumstance.
James Soong, 65, was today sentenced to three years jail in the Sydney Downing Court for failing to remit $6.7 million to the ATO.
Between October 1995 and July 1998 two companies operated by Mr Soong deducted tax instalments totalling $6.7 million from the wages of their employees. This money was not remitted to the ATO.
When the first of these companies was liquidated the employees were moved into the second company where Mr Soong continued to withhold funds from his employees’ wages without forwarding it to the ATO.
Tax Commissioner Michael D’Ascenzo said this case was an example of a ‘phoenix’ arrangement which involves the deliberate liquidation of a company to avoid paying outstanding debts.
The conviction is the result of a long standing joint investigation conducted by the Australian Federal Police and the ATO.
Soong will serve two years jail before being eligible for parole and has been ordered to pay back $6.7 million to the Commonwealth.
The ATO is seeking amendments to its powers with the introduction of the Draft Tax Laws Amendment Bill 2010 that will give the ATO discretionary power to demand security deposits from businesses as part of securing likely or expected tax obligations.
The draft legislation is an attempt to stop companies and directors engaging in phoenix activity.
The ATO estimates that the level of suspected phoenix cases may be in the order of $600 million and that this is an unacceptable risk to the governments revenue.>
Section 255-100 of the proposed Bill says:
The Commissioner may require you to give security for the due payment of an existing or future tax related liability of yours if: (a) the Commissioner has reason to believe that: (i) you are establishing or carrying on an enterprise in Australia; and (ii) you intend to carry on that enterprise for a limited time only; or (b) the Commissioner believes that the requirement is otherwise appropriate, having regard to all relevant circumstances.
The Bill gives the ATO power, at any time, to require such security deposits as the Commissioner considers appropriate. It is expected that the ATO will use this power in high risk industries known to be at risk for phoenix transactions and against directors with a history of failed companies with large tax debts.