Company directors: Ensure your tax debt is paid

Every company director needs to make sure that tax is paid, and on time. As TERRY HAYES reports, the consequences can be severe.

By Terry Hayes

Every company director needs to make sure that tax is paid, and on time – the consequences can be severe.

Being a director of a company, even a small or medium sized enterprise, carries with it important obligations.

One of those is to make sure the company remits tax deducted from employees’ wages to the tax office on time. Failure to do so can result in the director being personally liable for that tax.

Where a company fails to send money deducted from the salaries or wages of its employees (pay as you go [PAYG] withholding amounts) to the tax office, then the directors of the company at the relevant time will be personally liable for an automatic penalty equal to the amount of the unremitted or unpaid amounts. This penalty comes in the form of a director’s penalty notice.

If a company receives one of these notices, it has 14 days within which to act – either pay the outstanding tax (or enter into an arrangement with the tax office to pay it), or have an administrator appointed, or by placing the company into liquidation.

Cases before the courts have also confirmed that company directors have an obligation to ensure that amounts deducted from the salaries or wages of employees are remitted to the Tax Commissioner and not misused, for example, not used as part of the floating capital of the company, or for private expenses.

And it’s not only the tax office that is on the trail of company directors.

Recent action by ASIC during March 2008 saw it disqualify three directors from managing corporations following their involvement in failed companies that had outstanding tax debts.

ASIC said it disqualified a traffic management services operator, of Scarborough, Queensland, from managing corporations for three years. ASIC said the man’s disqualification followed its investigation into his role in 15 failed companies – No Banana, Donuts and Beers, EBA This, Damien Moll, CB Corporate Services, Fishing Chips, Fups (formerly United Protection Services), Paperless, Golfing Holidays Abroad, Hilo Card Services, Labour Favour, Lawful Alternatives, Rolls and Rolls, Spinctered and Zeke Services.

While there were 15 failed companies, inquiries by ASIC found that these companies related to three businesses and that 13 of the companies, that were all wound up at the same time, largely conducted the same business through the various forms in an attempt to avoid paying payroll tax.

ASIC said it found that the majority of the companies failed were owing money to employees for superannuation in addition to significant sums to the tax office and the state revenue office. ASIC said it found that in relation to the majority of the companies, the man failed to ensure that the companies maintained proper books and records or that he failed to provide records to the liquidator of the companies.

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In another case, ASIC disqualified a health club operator of Goonellabah, NSW from managing corporations for two years. Her disqualification was a result of an ASIC investigation into her role in two failed companies, ACN 097 400 738 Pty Ltd (formerly Inspired Life) and Osborne Park Gym.

ASIC said its investigation found that Inspired Life failed while still owing a significant debt to the tax office. ASIC also found that the operator failed to properly inform herself of the financial position of Inspired Life as required by a director in her position and that she allowed the company to trade while it was insolvent.

ASIC said it also disqualified a property developer of Pyrmont, NSW, from managing corporations for 18 months. The man’s disqualification followed an ASIC investigation into his role in three failed companies, Beacon Development Corporation, Bauhaus Pyrmont, and Pilot Developments.

ASIC said it found that Beacon Development and Pilot Developments failed owing substantial amounts. ASIC’s investigation also found that the man hampered the winding up of Beacon Development and Pilot Developments by failing to provide reports about the companies affairs to the liquidators.

ASIC said that all the above directors have the right to appeal to the Administrative Appeals Tribunal for a review of its decisions.

Receiving a director’s penalty notice is a serious matter. The key is the timing – don’t delay and don’t ignore the notice. Where the penalty is not paid and none of the options is taken, the Tax Commissioner can commence bankruptcy proceedings against the director, not to mention potential action by ASIC.

The message is clear – companies must ensure they remit their tax on time. It’s a chore, an obligation, but one that’s clearly stated in the law. No company director should ignore this or fail to be aware of it. If in any doubt, consult your adviser.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.