The 2011 Federal Budget may have been relatively mild with few surprises or major changes for average Australians but for all Australian company directors it was very significant. The Budget announced its plan to counter “fraudulent phoenix activities” by increasing personal liability for directors.
What are “phoenix activities”?
ASIC defines phoenix activities as those when a company:
- fails and is unable to pay its debts; and/or
- acts in a manner which intentionally denies unsecured creditors equal access to the available assets in order to meet and pay debts; and
- within 12 months of closing another business commences which may use some or all of the assets of the former business, and is controlled by parties related to either the management or directors of the previous company.
So what are the changes?
The Budget papers provide that with effect from 1 July 2011:
- the director penalty regime will be extended to superannuation guarantee amounts, making directors personally liable for their company’s failure to pay employee superannuation;
- the Australian Taxation Office (ATO) will be given the power to commence recovery against directors under the director penalty regime, without providing a 21 day grace period, for certain unpaid company liabilities that remain unreported after three months of becoming due; and
- in certain circumstances directors and associates of directors will be prevented from obtaining credits for withheld amounts in their individual tax returns where the company has failed to pay withheld amounts to the ATO.
It is difficult to say with certainty whether the legislation embodying these changes will extend to all directors or whether they will be limited to only those who have a history of phoenix activity. However, we have come to expect that legislative changes for these sorts are rarely limited in their scope and these changes are likely to apply to all directors.
What does this mean for businesses?
The bottom line is that company directors must from 1 July 2011 ensure that they are on top of their tax payment and lodgement obligations and superannuation contributions. Any temporary cash flow or liquidity issues will need to be addressed immediately as once the 3 month deadline after the due date has passed without either the tax (or super) being paid, a voluntary administrator being appointed or the company being placed into liquidation, it would appear that personal liability can’t be avoided.