As we know, the federal government has implemented a package of changes to Australian insolvency and bankruptcy laws to provide relief from the economic impacts of COVID-19.
The package included a temporary insolvent trading ‘safe harbour’, which provides company directors with temporary relief from the risk of personal liability for insolvent trading between March 25 and September 25, 2020, provided certain conditions are met.
We also know that the Australian Taxation Office has implemented a series of measures to assist taxpayers, including automatic lodgement deferrals and payment deferrals on request. For example, the ATO previously announced an extension of the lodgement and payment date for 2019 income tax returns to June 5, 2020, (and June 30, 2020, for SMSF returns).
Following a joint submission by the professional bodies to the ATO and Treasury, on May 25, 2020, the ATO announced that if tax professionals were unable to meet the deferred due dates, late lodgement penalties will not be imposed provided that returns were lodged by June 30, 2020.
In addition, some businesses affected by COVID-19 can apply to the ATO for payment deferrals up to September 14, 2020.
There are some who consider that the measures, together with other schemes such as JobKeeper and the cashflow boost, will lead to an influx of companies that are relying on COVID-19 relief measures to stay afloat.
Directors of companies that have sought deferrals from the ATO, or that are relying on any of the relief measures, should be wary, as the relief measures are not all-encompassing protections.
Subject to the specific deferrals granted by the ATO, companies are still expected to comply with their lodgement obligations, to pay their tax debts when they are due, and to comply with their directors’ duties, including the requirement to act in the best interests of the companies’ creditors. Importantly, for company directors, the ATO’s ability to recover unpaid tax liabilities under the Director Penalty Notice (DPN) regime has not changed.
What does this mean?
This means that company directors can be made personally liable to pay (as a penalty) outstanding amounts of Pay-As-You-Go (PAYG) withholding, superannuation guarantee charge (SGC), GST, luxury car tax and wine equalisation tax. Moreover, many companies will face economic difficulties well beyond the six-month period during which the temporary insolvent trading ‘safe harbour’ applies. Unless this temporary measure is extended by the government, it will not provide relief for debts incurred after September 25.
Directors’ personal exposure under the voidable transaction regime also remains in place. Under this regime, where the company has made payments towards PAYG, SGC or GST debt in the six months before the company goes into liquidation, in certain circumstances the liquidator can require the ATO to repay those amounts to the company.
The ATO can then seek an indemnity from the directors, effectively making the directors personally liable to reimburse the ATO for the lost payments. A number of requirements must be established for this regime to apply. Importantly, it will only apply if the company was insolvent when the original payments were made to the ATO.
While the ATO has largely put a halt on its debt recovery actions, except for pursuing the more troublesome and risky taxpayers, it won’t last forever. Come the end of September, the current JobKeeper scheme and the temporary insolvent trading ‘safe harbour’ are scheduled to end. This will likely trigger lenders and creditors to pursue their debtors more aggressively, and no doubt the ATO will want to be at the front of the queue to protect the government’s revenue.
Our advice? Be informed
Our practical advice for company directors is to be aware of the issues which they are facing, including whether there will be any reprieve in the coming months, with the understanding that tax liabilities will need to be paid at some point in time.
Directors who are concerned about solvency once COVID-19 relief measures end should be taking steps now to address their concerns by speaking to their accountant or trusted adviser and, if necessary, an insolvency practitioner. Similarly, advisers who are concerned about companies and businesses facing economic distress should speak up now.
There may be an opportunity for directors to rely on the pre-existing safe harbour provisions, introduced in 2017, to develop and implement a turnaround plan. Directors should also be open to formal insolvency options, such as administration, which may offer an opportunity to turn the economic impact of COVID-19 into a positive change.
One thing is for sure, waiting for the ‘end’ of the economic impact of COVID-19 with your fingers crossed is the worst choice you can make.
This article was first published by Hall & Wilcox.