Company directors’ lives getting more complicated

Directors of companies – small, large or otherwise – are facing increased attention from many regulators, including the ATO and ASIC. Throw in company shareholders and directors now seem to have many masters to satisfy.

We’ve all heard and read about legislative moves on director and executive remuneration.
 
Amendments that are now law, among other things:

• Strengthen the non-binding vote on the remuneration report by requiring a vote for directors to stand for re-election if they do not adequately address shareholder concerns on remuneration issues over two consecutive years – the “two strikes” test.
• Increase transparency with respect to the use of remuneration consultants – including disclosure of the aggregate consideration paid to a remuneration consultant for tax advice, legal advice and accounting services.
• Address conflicts of interests that exist with directors and executives voting their shares on remuneration resolutions.

The issue of corporate governance has also been a hot topic.

The Tax Commissioner recently reiterated that the ATO sees good corporate governance as the cornerstone for managing tax risk in the large corporate sector.

Managing tax risk doesn’t only apply to large corporates, it’s just that the tax risk is quantifiably larger there than with smaller companies, but smaller companies have tax risk issues too.

In the context of corporate governance a recent landmark decision by the Federal Court (Australian Securities and Investments Commission v Healey & Ors [2011] FCA 717 – known as the Centro Properties case) has put the spotlight firmly on company boards and directors in terms of their duties and responsibilities.

The case concerned the steps directors need take to secure compliance by a company of its obligations in relation to accounting records but it could easily apply to tax compliance as well. The Court found against the directors in a decision that raises the stakes and could have far-reaching consequences.

All of the above issues are placing increasing pressure on directors and company boards but it should not be assumed that they only apply to the big end of town.

Phoenix activities

In addition to the above the Government is targeting so-called “phoenix” activities by companies and it recently released for public consultation exposure draft legislation on the 2011-12 Budget proposal (announced on May 10, 2011) to counter fraudulent phoenix activities by company directors.
 
Fraudulent phoenix activity involves the deliberate liquidation of a company to avoid paying liabilities – including employee entitlements such as superannuation, and taxes. The business then “rises” and continues operations through another corporate entity controlled by the same person or group of individuals, often with a very similar name and free of debts.

Tough economic times can tempt some businesses to do strange things to keep afloat but phoenix activities are seen to push the envelope too far.

The amendments released will be designed to help to secure workers’ superannuation and are not limited to directors of phoenix companies but apply broadly to directors’ obligations to cause their company to pay certain tax liabilities and superannuation guarantee amounts for employees.

The Government will address those issues via three amendments to the Taxation Administration Act 1953:

• Extending the director penalty regime to make directors personally liable for their company’s failure to pay employee superannuation guarantee amounts, ie the current 9% amounts – this will be in addition to their liability for PAYG withholding amounts.
• Allowing the ATO to immediately pursue directors under the director penalty regime where the company’s unpaid PAYG withholding and superannuation guarantee liability remains unpaid and unreported three months after the due day, regardless of the character of the company’s underlying liability. A director’s personal liability can only be extinguished by payment of the debt or penalty. The current law will continue to apply where a company’s debt to which the director penalty applies is less than three months old or where the debt has been correctly reported before three months from the due day.
• Providing the Tax Commissioner with the discretion to prevent directors and in some instances their associates from obtaining PAYG withholding credits where the company has an outstanding PAYG liability.

The Tax Commissioner will have discretion in applying the law. Directors will have the ability to raise objections and legal defences where they have been made personally liable for their company’s non-compliance.

Comments on the draft legislation are due by August 1 this year to allow for the introduction of the changes in the 2011 spring sittings of Federal Parliament, which are scheduled to run from August 16-November 24 this year.

Company directors have companies to run but they need to be aware of – and carry out – their responsibilities across a wide and seemingly ever increasing range of areas. Failure to do so is an invitation to trouble.

They need to be aware of regulatory changes under way and especially the ATO’s increased attention to unpaid tax and superannuation liabilities. Life for them is getting more complicated.

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