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Directors are Personally Liable for GST Tax

The Goods and Services Tax (GST) was introduced on the 1st July 2000. In the period since that time the Australian Tax Office (ATO) has been relatively inactive in policing the GST legislation. The ATO took the approach that it was preferable for a honeymoon period to occur wherein difficulties and confusions relating to the GST and the payment of GST obligations to the tax office could be smoothed out amicably. There appears to have been minimal prosecutions with respect to GST breaches since the 1st July 2000.

Recent recruitment within the ATO suggest that this honeymoon period is rapidly coming to an end. In May of this year the Federal government announced that the ATO would receive massive resources to facilitate the development and expansion of the audit and recovery teams so that a more aggressive policy of targeting delinquent tax payers, particularly in the GST area could be implemented.

It is to be assumed that the process of recruitment and/or redeployment of ATO staff to the audit and recovery teams will take some time. There is evidence that appears to indicate that the ATO has stepped up the pace of its recovery/collection activities and the office is furthermore taking a tougher stance on slow payers or defaulters.

At the time of the introduction of the GST there was a general belief particularly by insolvency practitioners that GST would trigger a rush of business failures as particularly smaller business struggled with the formality of the new tax reporting process and the drain imposed on businesses and their cash flows. Insolvency practitioners to date surprisingly report that the expected flood of insolvencies assumed to follow the introduction of the GST did not eventuate and there has been no appreciable increase in the number of corporate failures or personal bankruptcies since that time.

What has been observed since the introduction of the GST is that many companies that are going into liquidation, receivership or voluntary administration have accumulated large, if not massive, debts owed to the ATO. There is a view that many of the debts that have accumulated to the ATO have built up because of the ATO's own policy, particularly since July of 2000 that minimal pressure be imposed upon tax payers in regard to the meeting of their tax liabilities and obligations.

Anecdotal evidence has suggested that a significant number of businesses are surviving because they are effectively using the funds collected for GST to fund the operational activities of their businesses notwithstanding the mounting debts of those businesses to the ATO. Those businesses have effectively deferred the crunch for poor business activity and profitability by living on the funds that more rightly should have been directed to the ATO. It is clear that many of the businesses that have adopted this philosophy are clearly insolvent and unfortunately the proprietors of those businesses hang on with the business in the desperate hope of some miraculous business improvement.

They may well be placing themselves and their companies at significant risk.

The recent indicators now appear to show a significant increase in the activities of the ATO in pursuing tax debtors. In this regard the ATO is a ferocious predator and a fearsome adversary. Those that have foolishly chosen to rob Peter (the ATO) to pay Paul (their staff, their suppliers, themselves) may well shortly find that the ATO is tapping upon their door. If indeed the ATO pursues companies for outstanding tax the ATO can use literally an armory of recovery weapons. The weapons of recovery are potentially deadly to business and painful to proprietors.

It is not widely known that in many circumstances the Directors of companies are personally liable for the company's debt when the company has failed to pay funds to the ATO. This applies particularly in respect of group tax. The liability of Directors falls due immediately upon the failure by the company to pay the instalment to the ATO office on the prescribed date. Directors have a continuing exposure, both jointly and severally with the company for group tax debts that are not paid to the ATO. The exposure of Directors in particular comes to a head when the ATO serves a notice on the Directors pursuant to section 222AOE of the Income Tax Assessment Act.

Under the legislation the Directors' personal liability is remitted only when one of the following things occurs.

1. The tax instalments are immediately paid.
2. An arrangement with the ATO is entered into for the repayment of the tax.
3. An administrator is appointed to the company.
4. The company initiates the process of winding up under the Corporations Act.

If none of the above things are done by the end of a 14 day period after the Directors notice from the ATO has been served, the ATO can recover the tax debt from each company Director on a joint and several liability basis.

The liability on the part of each Director of a company to pay arises on the date that the tax liability on the company became due and payable.

There are very few ways or means to avoid responsibility in these circumstances. Two defences are prescribed under the legislation, but they provide little benefit or assistance. The defences are:

1. The Director establishes that he did not take part in the management of the company at any time while a Director because of ill health or some other good reason.
2. The Director took all reasonable steps to ensure that one of the four actions referred to above was taken, or alternately there were no such steps that the Director could reasonably have taken in all the circumstances.

It is submitted that in the above circumstances it would be difficult for the defences to be made out. As a consequence a Director who receives a notice from the ATO should act immediately to comply with the terms of the ATO, otherwise his personal liability for the tax debt is activated.

The judgments in the case of Gould v FCT (98ATC4946) suggest that compliance with the requirements set out in section 222AOE does not automatically absolve directors of liability for unpaid tax. In Gould it was held that notwithstanding compliance by the director with the requirements of section 222AOE that he was still liable to pay a penalty equal to the amount of the outstanding tax in accordance with section 8Y of the Taxation Administration Act.

Because of the potential for large tax debts to have been built up progressively over the past few years during the time when the ATO has been relatively inactive, it is appropriate for companies that have fallen behind with their tax payment obligations to urgently take advice from practitioners who involve themselves in the world of insolvency and who understand the personal liabilities that the Directors may indeed be exposed to. A 14 day period is an extraordinarily short period of time and many Directors of struggling companies are reluctant to push the button that sees their life work go into administration or liquidation.
The company urgently has to meet its tax liabilities and debts, for many struggling businesses, this event will of itself cause businesses to literally hit the wall.

Unfortunately for many who have not been diligent in making their tax payments the ATO's 'soft and gentle' philosophy has allowed struggling businesses to survive longer than possibly they would have had the tax office adopted its more robust tax collecting philosophies. The increased cash flow received by the collection of GST has enabled many companies to meet their pressing creditors and commitments perhaps at the cost of allowing a growing debt to build to the ATO. With the ATO's increased focus on collection and the build up of resources of the area to implement those collections there is the strong likelihood that over the next 6 to 12 months there will be a dramatic increase in the number of companies that will need to place themselves into insolvency administration in response to the ATO's demands.

GWM can provide assistance to your firm in respect of attempting to control damage that may befall a company if action is taken promptly. For advice and assistance please contact Ian Paul who is both a solicitor and accountant who can initiate strategies to minimise damage.

Contact Ian Paul by phone on (02) 6583 5266.

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