The Federal Treasurer, the Hon Wayne Swan MP, has released the 2011-12 budget which if all goes to plan should hopefully result to surplus in the 2012/13 financial year. However, we will need to endure over $70 billion of deficits in the current and next financial year.
There is no doubt the government will have to focus on collecting revenue in order to achieve its predicted budget figures. It is our opinion that there will be no more ‘leniency’ from the tax office for non payment of tax. We are already seeing a tougher attitude from the tax office based on the enquiries we are receiving in our insolvency practice. In fact, the following is a section of the budget “Countering fraudulent phoenix activities by company directors” – Budget Paper No. 2 (pp 45-46), which emphasizes this point;
Countering Fraudulent Phoenix Activities by Company Directors
The Government will strengthen the tax law to counter fraudulent phoenix activity, which involves a company intentionally accumulating debts to improve cash flow or wealth and then liquidating to avoid paying the debt. The business is then continued as another corporate entity, controlled by the same person or group and free of their previous debts and liabilities.
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.
The above changes are quite significant and have serious consequences for Directors. Firstly, Directors from 1 July 2011 may become personally liable for non payment of superannuation. Secondly, the ATO will be able to initiate recovery (including recovering unpaid super) against Directors personally without having to provide the required notice to Directors, in cases where companies do not report their unpaid tax liabilities after three months of becoming due.
The changes will impact many companies, in particular within the SME space. Until now, many companies have been managing cash flow by deferring payment of tax (including not reporting tax until a later date when cash flow improves and allows payment of tax). This will no longer be a viable option for Directors if they want to avoid personal liability. Directors will now have to report all tax liability on time regardless whether their cash flow can accommodate payment of the reported tax immediately.
In our opinion the above changes will cause an increase in companies entering into insolvency as Directors will not want to take on personal exposure for their company’s superannuation and tax liabilities.
We will provide further updates in respect to the above upon further developments.