The recently introduced provisions requiring purchasers of real property to withhold up to 10% of the purchase price on account of GST are intended “to address and prevent tax evasion by unscrupulous property developers” (see the media release). In a similar vein, the Government announced in the Budget last week that the corporations and tax laws will be reformed to provide regulators with additional tools to assist them to deter and disrupt illegal phoenix activity. The package of reforms includes the following matters that impact GST:
- extending the Director Penalty Regime (DPR) to GST (and luxury car tax and wine equalisation tax) – making directors personally liable for the company’s debts;
- expanding the ATO’s power to retain refunds where there are outstanding tax lodgements.
The Budget is short on detail, but these reforms will likely have a significant impact on the way directors view their company’s GST liabilities. Set out below are some general comments on the position in other countries and how the DPR regime operates in Australia.
The position in other countries
The effect of the reforms will bring Australia in line with Canada, which makes directors personally liable for unpaid GST, although the ability to recover those liabilities under the DPR regime gives the ATO a much easier path. In Canada, recovery can only be made from directors where the Revenue has first demonstrated its inability to recover the amounts directly from the company, whether by the execution of a writ against the corporation or proving in the liquidation of the company.
In New Zealand, directors may be liable for unpaid GST in certain circumstances. There there must have been an arrangement entered into by the company, an effect of which was being unable to meet a tax liability (either arising at the time of the arrangement or after), with it being reasonable to conclude a purpose of the arrangement was to have that effect and that a director making reasonable enquiries at the time would have anticipated that a tax liability would or would likely be required to be met.
The DPR regime in Australia
Division 12 of Schedule 1 to the Taxation Administration Act 1953 (TAA) imposes various withholding obligations on entities, including s 12-35 which imposes an obligation on an entity to withhold an amount from the salary or wages it pays to an individual as an employee. The new withholding obligation on purchasers is to be included in this Division.
Subdivision 269-A of Schedule 1 imposes an obligation on directors to cause the company to comply with certain withholding obligations, in particular PAYG withholding and superannuation guarantee. These obligations continue until such time that:
- the company complies with its obligation; or
- an administrator of the company is appointed; or
- the company begins to be wound up.
Directors become liable to pay the Commissioner a penalty equal to to unpaid amount if the company does not comply with its obligation to withhold. The issue of a Director Penalty Notice to the director is a requirement before proceedings can be commenced by the ATO to recover the penalty and proceedings cannot be commenced until 21 days after the notice is given.
The penalty will be remitted if, within 21 days after the notice is given, the director causes one of the following to occur:
- payment of the liability by the company;
- appointment of an administrator of the company; or
- commencement of winding up of the company.
However, the second and third options cannot be used if more than three months have elapsed from the company’s due date – the only option in those circumstances is for the company to pay the liability.
The liability of a director to the penalty is subject to a number of defences, including:
- because of illness, or for some other good reason, it would have been unreasonable to expect the director to take part, and the director did not take part, in the company;
- taking all reasonable steps to ensure that one of the following happened:
- the directors caused the company to comply with its obligation
- the directors caused an administrator to be appointed
- the directors caused the company to begin to be wound up
- or there were no reasonable steps the director could have taken to ensure that any of the above things happened
An additional defence to the penalty for superannuation guarantee is where the penalty resulted from treating the Superannuation Guarantee (Administration) Act 1992 as “as applying to a matter or identical matters in a particular way that was reasonably arguable, if the company took reasonable care in connection with applying that Act to the matter or matters”. Effectively where the entity had a reasonably arguable position and it took reasonable care.
The DPR was extended to superannuation guarantee obligations pursuant to the Pay as You Go Withholding Non-Compliance Tax Act 2012. The Explanatory Memorandum to the Bill explained the concepts of reasonable care and reasonably arguably in the following terms:
1.55 Exercising reasonable care means making a reasonable attempt to comply with the relevant law. The effort required is one commensurate with all the company’s circumstances, including its knowledge, experience and skill.
1.56 The term reasonably arguable is defined in subsection 995‑1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to have the meaning given by section 284-15 of Schedule 1 to the TAA 1953. A matter is reasonably arguable ‘if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect’. This definition provides a suitable standard for the purposes of the defence.
1.57 Generally, if a company has a ‘reasonably arguable’ position, it will have also exercised reasonable care. However, there may be unusual cases where a company has failed to exercise reasonable care, but by chance has a reasonably arguable position. Both standards must be satisfied in order for the defence to apply.
I would expect that a similar provision will apply to unpaid GST. The GST can be a complex tax and there are numerous uncertainties in its application.