Legislative Changes - Director Penalties, Insolvent Trading & PPS Deferral
'YES’ To Director Penalties
The proposed changes to the director penalty regime, announced in this year’s Federal Budget, have now been introduced into the House of Representatives.
Two pieces of legislation, the Tax Laws Amendment (2011 Measures No. 8) Bill and the Pay As You Go Withholding Non-compliance Tax Bill were introduced on 13 October. The legislation, which has been extensively considered in past issues of eInsight, will give effect to the Government’s announcement of the extension of the director penalty regime to employee superannuation contributions and the enhancement of director penalty recovery options by the Australian Taxation Office.
The legislation sheds some light on the application of the new regime to PAYG(W) debts and super contributions which are currently outstanding.
The new automated recovery provisions apply to all director penalties that are due and payable at or after commencement of the amendments – which is the day after Royal Assent. So any PAYG(W) which is outstanding and unreported 3 months after the due date (return date for BAS) will be subject to the new recovery regime once Royal Assent is granted.
Note however that existing director penalties can be extinguished by the appointment of a voluntary administrator or liquidator before the date of Royal Assent and in such cases the automated recovery provisions won’t apply.
In relation to employee super contributions, the situation is slightly different. Personal liability attaches only where the company is originally required to lodge a quarterly superannuation guarantee statement (SGS) to report unpaid and overdue superannuation guarantee shortfall on or after the day after Royal Assent. Put simply, personal liability will only attach where SGS lodgment dates fall after the Royal Assent date. For example, for the September quarter, the SGS lodgment date is 28 November. If Royal Assent to the legislative amendments is granted before then, directors will become personally liable on 28 November for any unremitted super contributions for the September quarter. But if Royal Assent is granted after 28 November, personal liability won’t attach to super due for the September quarter (or any previous quarter).
Note also that the new automated recovery process will apply only where the superannuation remains outstanding and unreported 3 months after its due date. The ATO does however retain the power to recover the amount from a director personally prior to that time, but only if a director penalty notice (DPN) is issued first.
The legislation has been referred to House Economics Committee. There is still a small window of opportunity to avoid the imposition of automatic liability in relation to existing unreported PAYG(W) liabilities where steps are taken to extinguish the director penalty before Royal Assent is granted. Please contact Lawler Partners for more details and assistance.
‘NO’ To Insolvent Trading
In a media interview in late September, the Parliamentary Secretary to the Treasurer, David Bradbury, announced that the Government had no plans to change Australia’s insolvent trading laws. Mr Bradbury’s ministerial responsibilities include assisting in the design and implementation of legislation in relation to corporate governance and insolvency.
Mr Bradbury’s comments followed last year’s release of a Treasury discussion paper which considered options to protect directors from potential liability for insolvent trading claims in the context of attempted business ‘rescue’ outside of a formal external administration process.
One of the proposals of this discussion paper, the proposal for a modified ‘business judgment rule’ to relieve a director from his/her obligation not to trade whilst insolvent, was supported by the Australian Institute of Company Directors, the Law Council of Australia and the Insolvency Practitioners Association of Australia, among others. This proposal was to operate so that a director would be deemed to have satisfied his/her duty if the financial accounts and records of the company presented a true and fair picture of the company’s financial circumstances at the relevant time, the director was following restructuring advice from an appropriately experienced, qualified and informed professional and it was the director’s business judgment that the interests of the company’s creditors and members were best served by pursuing restructuring.
Mr Bradbury advised that there was a lack of evidence to support the contention that changes to laws surrounding insolvent trading would result in more successful company work-outs. Although there has been no formal announcement by the Government of its abandonment of the proposed insolvent trading reforms, Mr Bradbury’s statements reinforce the Government’s existing policy on creditor protection and creditor rights in the area of corporate insolvency. This is arguably in contrast to the US culture of protection of directors who seek to restructure within Chapter 11 of the US Bankruptcy Code.
As we highlighted in the previous edition of eInsight, ASIC statistics reflect increasing corporate insolvencies. More informal work-outs and restructuring are likely in worsening economic conditions. The Government may yet revisit the issue of reform to the insolvent trading laws.
'WAIT A BIT’ For PPS Reform
Finally, a further delay to the introduction of the Personal Property Securities (PPS) regime and the introduction of the PPS Register has been telegraphed by this month’s introduction to the House of Representatives of the Personal Property Securities Amendment (Registration Commencement) Bill.
This Bill proposes amendments to the PPS Act to ensure that the operative provisions will not automatically commence before the availability of the PPS Register. Without the amendments, the default commencement date of the PPS Register is to be no later than 1 February 2012.
The PPS Act was originally intended to commence operations in May this year – but the commencement date was deferred to October. In September, the Attorney-General advised that the commencement date was to be further delayed and this latest legislative amendment indicates that there may have been issues identified during recent systems testing of the PPS Register by industry volunteers.
These issues may suggest risks in complying with the default commencement date of 1 February 2012. However the Government has indicated that it is still working towards that date.
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