A timely reminder of taxation obligations for directors and officers

Boards sometimes complain that much of their time is spent on compliance issues rather than on strategic issues. However our experience is that directors and officers need to ensure that there are proper and effective corporate governance structures that ensure all types of risks and compliance issues are properly addressed and handled.  

Risk and compliance issues that can be forgotten at board level include the management of tax risk and compliance with tax obligations, perhaps because these traditionally have been handled by the Tax Manager or Chief Financial Officer.

Given the recent publication by the Australian Taxation Office (ATO) of their ‘Large business and tax compliance’ booklet, it is timely to remind directors and officers of their obligations at law particularly when dealing with tax risks. The principles set out in that booklet apply to all companies, not just large businesses.

The ATO actively risk reviews all types of companies. All large corporate groups are scanned using the ATO’s risk filters, with 30% risk reviewed. Our experience is that companies that operate in certain industries such as mining and property are more likely to be risk reviewed. Companies attract greater attention from the ATO if they have:

  1. significant restructures, mergers, acquisitions, divestments or other corporate activities;

  2. unexplained losses;

  3. a history of low effective tax rates;

  4. financial and tax profiles that are inconsistent with the ATO’s view of industry patterns; or

  5. related party transactions, particularly with overseas parties.

The ATO expects board members to play a crucial role in ensuring that companies have strong corporate governance structures. Directors and officers need to understand the risk rating for their companies. 

The ATO expects boards to consider tax risks, obligations and issues when considering major transactions, arrangements and strategies. 

Boards need to understand the tax effects on transactions and determine the level of tax risk that is acceptable. That level of agreed tax risk should be filtered down to operational levels. 

Many companies, particularly private and junior mining companies, typically do not have significant tax resources or any sound tax risk management strategy or policy.    

It is important to note the ATO’s expectation of boards and companies and how the ATO sees directors and officers discharging their duties at law. Failure to handle tax risks may not just have an impact on the bottom line but also indicate a failure within the overall corporate governance framework. This could expose directors and officers to personal liabilities and adverse reputational risks.

A director or other officer of a company may be personally liable for tax debts of a company. Often forgotten, however, is the fact that this liability extends to de facto and shadow directors, a company secretary and any other officer, which includes a person involved in the management of the company. 

These liabilities are set out in various legislation, including the Income Tax Assessment Act 1936, Taxation Administration Act 1953 and the Corporations Act 2001.

Under various legislation, a director and officer can be:

  1. personally liable for unremitted amounts of Pay As You Go (PAYG);

  2. liable to indemnify the ATO as a creditor for insolvent trading;

  3. liable for penalties for failing to lodge documents on time; and

  4. liable for penalties for false or misleading statements, including in approved taxation forms.

It is important to remember that companies must meet their PAYG obligations. The legislation requires that directors ensure that any of the following four actions are completed before the due date for a company to meet its PAYG obligations:

  1. remit the required PAYG amount;

  2. enter into a payment agreement with the Commissioner;

  3. appoint an administrator to the company; or

  4. appoint a liquidator to the company.

If a company fails to do any of these four things by the due date, the directors may be personally liable to pay a penalty equal to the unremitted amounts.

Directors can incur penalties equal to their company’s unpaid remittance provision liabilities, unpaid estimates of those liabilities or the unpaid instalments of a defaulted payment agreement under section 222ALA of the Income Tax Assessment Act 1936.

The defences for directors against such liabilities are limited and are interpreted narrowly. They are:

  1. the director did not manage the company because of some illness or other reason; or

  2. the director demonstrates that he/she took reasonable steps to ensure that the company complied with its taxation obligations, having regard to the four things that directors must do before the due date of payment. 

Time is of the essence, and the courts will look at the steps taken and the time it took to effect those steps. Just because a director only held office for a short period of time is not a defence in itself. A court has found that a director can be liable even if that director held office for only 17 days and even when the notice of default from the ATO was not served when that person was a director of the company. The point being that the company had failed to comply with its tax obligation when that person was a director, and that director had, accordingly, failed to ensure that the company met its tax obligations. The director had failed to do any of four things that he should have done.

If the ATO believes that a director has incurred a penalty, it will endeavour to issue a director penalty notice as soon as practicable after the penalty is incurred.

The ATO’s receivable policy is clear that:

 '…directors penalties owed by directors are likely to be parallel liabilities, such that the Commissioner may commence action against any or all of the directors in an attempt to recover an amount equivalent to the underlying company’s liability. The policy also states that before determining which directors to pursue, the Commissioner will have regard to a number of factors, including each director’s capacity to pay and the relative merits of any defences that may be available to them.'

A director and officer can also be deemed to have committed a taxation offence if a company commits a taxation offence. 

Where a company commits a taxation offence, a director and officer may defend against a taxation offence if they show that they:

  • did not aid, abet, counsel or procure the act or omission of the company concerned; and

  • were not in any way, by act of omission, directly or indirectly, knowingly concerned in, or party to, the act or omission of the company.

Lavan’s comments

The issue last month of the ATO’s revised 'Large business and tax compliance booklet', which can be downloaded here: http://www.ato.gov.au/corporate/content.asp?doc=/content/33802.htm, is a reminder of the responsibilities faced by directors and officers for a company’s taxation obligations. 

The ATO’s expectation of directors and officers to ensure that a company’s taxation obligations are met is high. Lavan’s experience is that a proactive approach to tax and corporate governance is required, and a proper risk management policy needs to be in place. Ignorance is not a defence. 

If you have any queries about the revised compliance booklet and whether you are at risk, please contact Tony Chong, Partner, on (08) 9288 6843 or tony.chong@lavanlegal.com.au.