Late tax return deterrent set to impact small businesses

Company directors who fail to lodge their tax returns on time could become personally liable for the debts under a Federal budget change, with accountants warning that the measure will significantly impact small businesses.

Announced as a budget measure, business directors who lodge their tax returns more than three months late may become personally liable for their debts.

The move is expected to raise $260 million in additional revenue over four years, and is aimed at stopping fraudulent phoenix activity, which refers to the evasion of tax and other debts by the deliberate liquidation of companies.

According to a spokesperson for Assistant Treasurer Bill Shorten, the move will allow the Australian Taxation Office to target company directors who “pose the greatest risk to employee entitlements and tax collection, especially those that have previously engaged in fraudulent phoenix activity”.

However, the spokesperson says the ATO’s powers “will not be confined to the pursuit of phoenix companies”, and may be applied more widely to directors who fail to ensure their companies pay taxes and superannuation amounts on time.

The ATO will be given the power to commence recovery against directors under the director penalty regime, without providing a 21-day grace period, for certain unpaid company liabilities that remain unreported after three months of becoming due.

In certain circumstances, directors and associates of directors will be prevented from obtaining credits for withheld amounts in their individual tax returns where the company has failed to pay withheld amounts to the ATO.

Yasser El-Ansary, tax counsel at The Institute of Chartered Accountants, has questioned the nature of the changes.

“If what is being proposed as part of this measure is a backdoor crackdown on small businesses… it would be a cause for concern on policy grounds,” he says.

Accounting firm Taylor Wooding says the measures impose further onerous personal obligations and liability on directors, including where there is no intentional engagement in phoenix activity.

According to the company, businesses with outstanding tax and superannuation debts, or general financial and cashflow difficulties, should seek independent advice as soon as possible.

“A failure to take prompt decisive action will diminish the prospects of the business continuing and also increase the likelihood of directors becoming personally liable for the company’s debts,” it says.

The accountancy firm says directors can take steps to mitigate their potential personal liability for outstanding taxes and superannuation, including:

• Keeping proper and accurate records and accounts.
• Ensuring tax and superannuation liabilities are accurately assessed and statutory returns are prepared on time.
• Ensuring lodgment and remittance status are regularly reported to directors.