In the third instalment in our series relating to the proposed budget reforms to combat illegal phoenix activity we consider the proposed change that will likely have the greatest impact on personally liability of company directors – the expansion of the Director Penalty regime to include Goods and Services Tax (GST), Luxury Car Tax (LCT) and Wine Equalisation Tax (WET).
What Does This Mean For Your Clients?
In the small business world where shareholders and directors are so often one and the same, the proposed expansion of the Director Penalty Notice (DPN) regime effectively further winds back the corporate veil and the concept of limited liability afforded to company members. The proposed reforms will see much greater pressure placed on directors to report and pay company taxes on time or face assuming these debts personally. It will have a significant impact on the personal exposure of thousands of company directors.
One of the defining features of an illegal phoenix is the intention of directors to avoid payment to creditors, and it is apparent that the proposed changes are seeking to restrict this behaviour, by broadening the scope of the current Director Penalty regime.
While any action that combats the negative impact of illegal phoenix activity on the business community and society should be applauded, it is our belief that the proposed reform may have unintended consequences and, in some respects, fly in the face of the Safe Harbour legislation that came into effect in September 2017 as part of the National Science and Innovation Agenda. It is likely directors will seek to use insolvency to remit their personal liability rather than working through a more effective business turnaround solution.
Directors faced with a very short window to act on a Non-Lockdown DPN (21 days from date of issue) may enter a course of action that could be considered an illegal phoenix as they seek to maintain operation of their business, whilst remitting their personal liability. When coupled with the proposed penalties for advisors who incite and facilitate illegal phoenix transactions it has never been more crucial to ensure that you and your clients are able to access timely, accurate and practical advice when it is needed most.
How Can You Help Your Clients?
There are several immediate actions you should be taking to ensure your clients are managing their business and personal risk while doing what they do best, running their business.
- Ensure your clients are lodging their Superannuation Guarantee Charge and Business Activity Statements within three months of the due date. Lodgements outside this time frame create the potential for a Lockdown DPN which reduce the options available for directors to manage their personal risk.
- Make sure company records kept are up to date for your clients. DPN’s are delivered to a director’s home address and not the company’s registered office. With only 21 days from the date of postage to react to these notices, it is crucial that they are not being sent to an address where the director will not receive it.
- Regularly monitor the Quick Ratio of a business. This is a simple calculation that identifies cash flow stress.
- Where your clients are facing these issues engage the advice of ReGroup Solutions to ensure they establish a course of action that will deliver the best possible outcome for all stakeholders whilst managing their personal risk.
Where Can You Get Further Information?
- Reforms to combat illegal phoenix activity – Draft Legislation
- Director Penalty Notice
- Mounting Risk For Advisors
If you would like to discuss these changes or any of the other proposed reforms and how they may impact your clients, please feel free to contact us.