Our featured article for the month covers two proposed legislative changes to the recovery of GST – these are significant changes and are expected to be enacted very soon. These changes will hopefully not apply to your organisation, but we firmly believe it is crucial to be vigilant of potential risks caused by late BAS lodgements and undisclosed/unpaid tax debts, in this case GST.
We recommend this article be read in conjunction with our accompanying Payroll & GST Article – Directors Penalty Notices.
Two significant legislative changes have been proposed to the process of recovering the payment of GST.
Under the first change, the Commissioner of Taxation (Commissioner) will be able to estimate the net amount of GST which is payable for a tax period (the GST payable) where the net amount has not been assessed. Normally, an assessment of GST occurs when the taxpayer lodges its BAS. The proposed amendment will allow the Commissioner to recover the estimate as a debt that is separate from the underlying liability of the taxpayer to lodge a BAS and pay the net amount of GST shown in the BAS.
Under the second proposed change, directors (within the meaning of the Corporations Act 2001) of a company will be personally liable for:
- any net amounts of GST payable by the company of which they are directors; and
- any net amount of GST which the Commissioner estimates the company is liable to pay.
It appears that the director penalty regime does not apply to local government councils per se. However, where a council conducts activities through a company incorporated under the Corporations Act, the regime would apply to such company.
The proposed legislation provides that the changes will take effect from the beginning of the first quarter to occur after the relevant bill is enacted.
Taxpayer’s liability for estimated GST
The proposed changes will include GST in the group of taxes to which Div. 268 of Sch. 1 of the TAA 1953 (Sch. 1 TAA) applies. In overview:
- The Commissioner will be able to give a taxpayer a notice in which the GST payable for a tax period is estimated. The notice can only relate to the amount of GST which the Commissioner estimates is payable in respect of a tax period and which has not previously been assessed. It appears that under-disclosure of GST in a BAS, as well as non-disclosure through failure to lodge a BAS, can be estimated.
- The taxpayer is required to pay the estimate when the notice is given.
- The issue of a notice does not affect the taxpayer’s obligation to lodge a BAS in relation to the tax period and pay the amount of GST disclosed in the BAS. However, any GST paid pursuant to the notice for the tax period is also credited against the underlying GST assessed by lodging a BAS (and vice versa). Looking ahead to the second proposed change (which will be discussed in further detail below), any whole/part payment of a director penalty in relation to either the estimate or the underlying GST liability for the tax period will discharge the estimate, and underlying liability, to the extent of the payment (and vice versa).
- The estimate can be varied or revoked by the Commissioner. It can be reduced by the taxpayer acting in various ways, including the provision of a statutory declaration (or in some cases an affidavit) which, basically, states (or, in the case of an affidavit, proves facts which show) that the unpaid amount of the underlying liability is a particular amount which is less than the Commissioner’s estimate. Such a declaration/affidavit can also be used where the Commissioner has made an estimate and the taxpayer does not have any net amount of GST for the relevant tax period. The declaration/affidavit must be provided within a time frame prescribed by the tax law.
- If the estimate is not fully paid within seven days after the Commissioner gives the notice, the taxpayer is liable to pay general interest charge (GIC) in relation to the unpaid part of the estimate. However, payment of this GIC will also be treated as payment of GIC arising in relation to the underlying liability to pay GST (and vice versa).
The explanatory memorandum (the EM) for the proposed legislation illustrates the estimation process in the following series of examples:
Example 4.1 Estimate liability paid – no assessed net amount
Peter has failed to lodge his GST return in relation to a tax period. The Commissioner makes an estimate of Peter’s net amount in the amount of $20,000.
Peter pays $10,000 to partially discharge the estimate liability. The estimate liability is reduced to $10,000. Peter does not have a liability to pay an assessed net amount. The $10,000 Peter has paid towards his estimate liability is held-over until Peter lodges his GST return.
After making the initial $10,000 payment Peter lodges his outstanding GST return. Based on the information in the return, Peter is assessed as having an assessed net amount of $25,000 owing to the Commissioner. The held-over $10,000 is applied to the liability to pay the assessed net amount, the balance of which is reduced to $15,000.
Example 4.2 Estimate liability paid – assessment issued
Further to Example 4.1, Peter makes an additional payment of $5,000 towards the estimate liability. The estimate liability is reduced to $5,000. The balance of the liability to pay the assessed net amount is reduced to $10,000.
Example 4.3 Assessed net amount liability paid
Further to Example 4.2, Peter pays $10,000 to fully discharge the liability to pay the assessed net amount.
This amount is applied to Peter’s estimate liability but, because the amount is greater than that liability, only the amount of outstanding estimate liability ($5,000) is applied (subsection 268-20(5)), reducing the balance of liability to nil. Peter has now satisfied his obligations.
Directors’ personal liability for GST: Director penalty notices
The imposition of penalties on directors (Div. 269 Sch. 1 TAA) of companies registered under the Corporations Act 2001 in relation to:
- certain taxes which a company has not paid; or
- estimates of those taxes made under Div. 268
is discussed generally in our accompanying Payroll & GST Article – Directors Penalty Notices. Fundamentally, penalties are imposed on directors in the amount of the unpaid relevant tax or the unpaid estimate of the relevant tax. The payment of the penalty reduces the corresponding amount of tax, or the corresponding estimate of tax, and vice versa.
The following discussion illustrates in more detail the proposed extension of Div. 269 to GST.
Unpaid net amounts of GST and unpaid GST instalments
This section relates to the recovery of penalties for an unsatisfied liability of a company to pay assessed net amounts of GST and GST instalments under the GST Act. In the next section, we consider recovery of director penalties for estimates of GST.
A director has an obligation to ensure GST is paid on time or the company promptly goes into voluntary administration or liquidation. For assessed net amounts of GST, the obligation arises on the last day of the tax period (the initial day). For GST instalments, the ‘initial day’ is the end of the GST instalment quarter. In each case, a director is unable to avoid the penalty by resigning after the initial day.
With the exception of new directors, a director incurs the penalty where the obligation is unsatisfied by/on the day the GST must be paid (the due day).
A person who becomes a director after the due day (a new director) is allowed 30 days from day of becoming a director to ensure that the company either pays the GST or goes into administration/liquidation. Where this does not occur, the new director incurs the penalty.
The Commissioner is only able to recover the penalty from the director (including a new director) where 21 days have elapsed after the director is issued with a penalty notice.
The EM gives the following example:
Example 4.4 Director penalties
Emma and Julie are directors of Swift Supply Pty Ltd.
Swift Supply is required to pay and report GST on a quarterly basis under section 27-5 of the GST Act. Swift Supply is required to lodge its return for the quarter ending 30 June 2019 by the due date of 28 July 2019 (section 31-8 of the GST Act).
Swift Supply lodges its return more than three months late on 1 November 2019. The return gives rise to a liability for Swift Supply to pay an assessed net amount of $100,000. The due date for the payment is 28 July 2019 (section 33-3 of the GST Act).
Emma and Julie are under an obligation to ensure Swift Supply pays the liability, enters administration or begins to be wound up. The obligation begins on the initial day, the day the tax period ended (30 June 2019).
Julie resigns from Swift Supply on 20 July 2019. This does not affect her obligation in relation to the company’s liability.
Swift Supply is never in a position to pay the liability. As such, both Emma and Julie were required to place the company into administration or begin winding it up. This does not happen on or before the due date of 28 July 2019 and the director penalties begin to apply from this date.
The Commissioner issues director penalty notices to Emma and Julie on 1 February 2020. The Commissioner may begin recovery proceedings on or after 23 February 2020.
Under the proposed change, the penalty is remitted (subject to a qualification) where the director:
- ensures the company pays the assessed net amount of GST; or
- causes the company to go into administration/liquidation
before the penalty notice is issued or within 21 days of its issue.
The qualification is that, where remission arises due to the company going into administration/liquidation (the event):
- The penalty will be remitted in full where the event occurs within three months (three-month window) after the due day.
- Where the event occurs after this three-month window and before the penalty notice takes effect, ‘only the amount of the company’s assessed net amount liability that was calculated by reference to information reported to the Commissioner’ prior to the end of the three-month window is remitted.
- Where a person becomes a director within or after the three-month window, the person will be able to obtain full remission if the event occurs within three months of their appointment.
The foregoing remission regime is illustrated in the EM:
Example 4.5 Remission of penalties
Further to Example 4.4, Kerrie is appointed as a director of Swift Supply on 15 November 2019 and is immediately under the obligation to ensure Swift Supply pays the liability, enters administration or is wound-up. The penalty arises for Kerrie after 30 days on 15 December 2019.
The Commissioner also issues a director penalty notice to Kerrie on 1 February 2020.
Emma and Kerrie place Swift Supply into administration on 10 February 2020.
The original directors, Emma and Julie, satisfy the first condition to have their penalties remitted because their obligation is satisfied on 10 February 2020, before the end of the 21‑day period on 22 February. However, because Swift Supply entered administration more than three months after the company’s due date of 28 July, the penalty is locked down. The entire amount of the penalty is locked down because the company’s GST return for the June quarter was more than three months late.
As a new director, Kerrie is entitled to a full remission of the penalty because Swift Supply entered administration:
- within 21 days of the director penalty notice being issued to Kerrie; and
- within three months of Kerrie being appointed a director.
Example 4.6 Partial remission of penalty
Aaron is the sole director of Tangent Communications Pty Ltd.
Tangent Communications is required to pay and report GST on a quarterly basis under section 27-5 of the GST Act. Tangent Communications is required to lodge its return for the quarter ending 30 June 2019 by the due date of 28 July 2019 (section 31-8 of the GST Act).
Tangent Communications lodges its return on 23 July 2019. The return gives rise to a liability for Tangent Communications to pay an assessed net amount of $150,000. The due date for the payment is 28 July 2019 (section 33-3 of the GST Act).
Aaron is under an obligation to ensure the company pays the liability, enters administration or begins to be wound up. The obligation begins on the initial day, the day the tax period ended (30 June 2019).
Tangent Communications is never in a position to pay the liability. As such, Aaron was required to place the company into administration or begin winding it up. This does not happen on or before the due date of 28 July 2019 and the director penalty begins to apply from this date.
On 1 September 2019, Tangent Communications provides further information to the Commissioner to correct an error in the company’s GST return and requests an amended assessment. The Commissioner agrees to issue an amended assessment to the company. Under this assessment, the company has an assessed net amount of $200,000. This does not affect the due date for the company to pay the amended assessed net amount (28 July 2019).
On 15 January 2020, the Commissioner further amends the company’s assessed net amount for the period ending 30 June 2019, increasing the assessed net amount to $220,000. This does not affect the due date for the company to pay the amended assessed net amount (28 July 2019).
On 1 February 2020, the Commissioner issues a director penalty notice to Aaron for the company’s outstanding $220,000 liability. The Commissioner may begin recovery proceedings on or after 23 February 2020.
Aaron places Tangent Communications into administration on 10 February 2020, before the end of the 21‑day period on 22 February.
Because Tangent Communications lodged a timely GST return for the relevant period, the entire penalty is not locked down. However, because the information the company provided to the Commissioner led to an understatement of the company’s assessed net amount, the shortfall amount ($20,000) is locked down. The remaining director penalty amount of $200,000 is remitted.
The qualification only relates to assessments of net amounts of GST. It does not affect the application of the general principle in relation to GST instalments. A director’s penalty in relation to a GST instalment will be fully remitted where the company that has not paid a GST instalment goes into administration/liquidation by the date which is 21 days after issue of a director penalty notice.
Estimates of GST – Director penalties
Where the Commissioner estimates GST payable by a company under Div. 268, then under Div. 269 the directors have an obligation to ensure the company pays the estimate or promptly goes into administration/liquidation.
Basically, Div. 269 applies to estimates of GST in the same way that it applies to the assessed net amounts of GST discussed in the preceding section. Differences in legislative drafting reflect the fact that a net amount has not been assessed in relation to a tax period and the Commissioner has estimated the net amount for the relevant tax period. The drafting ensures:
- The initial day for the purposes of estimates of GST will be the last day of the tax period.
- The three-month window, where the director penalty for non-payment of the estimate will be remitted in full, commences on the day the company was required to lodge its GST return for the tax period.
As a director, what do I do?
Directors should specifically monitor their company’s compliance with its GST obligations (notably, to lodge BAS’s and pay GST). This will enable any non-compliance/anticipated non-compliance to be identified and timely action taken to avoid incurring, or to obtain remission of, personal liability for GST. As a bare minimum, directors should seek professional advice where the company is unable effectively (e.g. without creating a preferred creditor) to perform its GST obligations immediately non-performance is identified or where it is anticipated that the company will not be able to perform those obligations effectively.
Editor’s note: These proposed changes are complex and can have significant consequences on a company and its directors. If you have any questions about these changes, you can use our Q&A tool. Do you require more detailed analysis of your tax issues? As a registered tax agent, TaxEd can also provide tailored tax advice—contact us today!