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‘Twixt the devil and the deep blue sea

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Regular readers of B2B will recall that in previous editions I have written about the ability of the Australian Taxation Office (ATO) to recover unpaid taxes in insolvency situations. Over the past two years the scope of those recovery powers has widened significantly and this has implications for company directors and insolvency practitioners alike.

Many company directors still believe that the ATO receives priority in an insolvency appointment. This is not the case. In 1993 the ATO was removed as a priority creditor in all corporate windings up (other than for unpaid superannuation guarantee amounts). In exchange, the ATO gained the ability to make directors personally liable for certain unpaid taxation debts of their companies through the issue of a Director Penalty Notice (DPN).

The traditional escape route for directors issued with a DPN under that regime has since been to appoint a liquidator or administrator to their company and, as a consequence, avoid personal liability.

In 2013 this system received a crucial amendment. Now the ATO has the ability to issue a ‘new’-style DPN in respect of unpaid debts, that have not been notified to the ATO, and are outstanding for longer than 3 months. Critically, the former escape route of liquidation or administration is now closed, meaning that once the DPN is issued (for non-notified debts), the director is immediately personally liable.

Furthermore, the ATO can estimate the unpaid debt in circumstances where there is evidence to support an estimate (e.g. historical PAYG withholding amounts being previously paid).

Perhaps even more alarmingly, invoking an insolvency appointment does not remove the problem under a ‘new’ DPN. In a recent matter, a director of a Company in liquidation received a ‘new’ DPN some 6 months after the date of liquidation – ultimately leading to his decision to declare bankruptcy.

In the brief period since our office has re-opened in the new year, we have received a number of enquiries from company directors seeking the refuge of an insolvency appointment to their company, in order to avoid the spectre of a DPN that either has issued, or is likely to issue. Sadly, some directors, like the one cited above, have acted too late and the liability has attached.

Now more than ever, early advice is the key in the face of unpaid taxation debts, in particular outstanding superannuation guarantee contributions and unpaid PAYG withholding sums. The consequences of inaction can be uncomfortable.

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