NEWSLETTER AUTUMN 2006
01 03 2006
This publication is produced by Foremans Business Advisors specifically focusing on insolvency issues relevant to accountancy practices. In this inaugural edition we consider the power of the Director’s Penalty Notice and the importance of immediately acting on same if received by an accountant on behalf of a client. We also review the benefits to both directors and salary and wage clients under the GEERS scheme for employees.
BEWARE! DIRECTORS PENALTY NOTICES
The ATO in 1993 surrendered their right to any dividend priority in corporate insolvency administrations on the basis that they obtained the ability to make directors, in certain circumstances, personally liable for a company’s outstanding tax obligations.
This ‘trade-off” resulted in the establishment of Section 222AOE Notices under the Income Tax Assessment Act (or more commonly referred to as Director’s Penalty Notices) exposing a director personally for a company’s failure to remit tax installments and other deductions (eg. PAYG). Pursuant to Section 222AOE, the ATO is not entitled to recover the company’s unpaid taxes from the director personally until the expiry of a 14 day notice period.
The ATO also has the power to make estimates after the due date for payment and when a return has not been lodged. Given the harsh personal consequences, it is therefore essential that an accounting practice, who may receive this notice from the ATO on behalf of their client (eg. as a result of being the Registered Office) is fully aware of the serious implications to their client personally from the receipt of same.
Given that the Section 222AOE Notice has an “action” period of only 14 days to avoid personal liability of the director, it is essential that steps are taken immediately by the accountant to notify their client of this notice and the implications thereof.
We have seen instances where the Section 222AOE Notice has not been immediately referred onto the client by the Tax Agent and on the expiry of 14 days the director has become personally liable for the tax debts of the company.
For the penalty to the director (not the debt of the company) to be remitted in full (thus avoiding personal liability), the director must cause the company, within 14 days of the notice, to do one of four (4) alternatives:
- 1. To discharge the liability;
- 2. Have in force an agreement relating to the liability under Section 222ALA;
- 3. Appoint a Voluntary Administrator to the company; or
- 4. Wind Up the company.
Statutory defences are however available to a director, including because of illness (or some other good reason) the director did not take part in the management of the company at the time the remittance was due, the director took all reasonable steps to cause the company to comply or no such steps could have been taken.
GEERS – SOMETHING TO SMILE ABOUT
The insolvency of a business is a distressing time for the owners of the business who may have lost their hard earned investment but spare a thought also for the significant impact it has on the employees of the business.
Until recently, employees, despite having a priority for payment ahead of unsecured creditors for their outstanding entitlements, were only able to recover their outstanding entitlements if there were sufficient assets available to meet the other priorities ahead of employee claims. In addition, sufficient recoveries could take more than a year to eventuate. This uncertainty of payment and time lag coupled with the need to find alternative employment placed great pressure on the household.
The introduction of the General Employee Entitlements & Redundancy Scheme (“GEERS”) on 12 September 2001 has alleviated to some extent some of these pressures. From 1 November 2005 this scheme has been modified to provide further assistance to those affected by insolvency. Under the current scheme, employees impacted upon by a liquidation or bankruptcy of their employer have the ability to lodge a claim with GEERS seeking payment of the following:
- unpaid wages (up to a annual wage threshold of $94,900 and now includes underpayment for the three months prior to the appointment of the Insolvency Practitioner);
- unpaid annual leave;
- unpaid long service leave;
- unpaid notice in lieu; and
- unpaid redundancy (to a maximum of 8 weeks)
Note that superannuation entitlements, which are often outstanding on the appointment of an Insolvency Practitioner, will not be paid by GEERS. Superannuation does however continue to maintain a strong priority under the Corporations Act for dividend purposes.
The decision to pay the claim rests with GEERS and a claimant will usually be ineligible if:
- they were contractors, subcontractors or agents (ie. they must have been an employee);
- the Insolvency Practitioner expects there will be funds available to pay the outstanding entitlements within 16 weeks of the claim being received by GEERS;
- the claim is received greater than 12 months after their termination of employment or the date of the Insolvency Event; or
- failure to provide additional information requested by GEERS.
Generally we have found that GEERS have paid the approved claims within 6 - 12 weeks of the liquidation or bankruptcy of the employer.
Until 1 November 2005, directors (or those related to a director) were not eligible to any payment under GEERS. Directors (or those related to a director) are now eligible to the limits otherwise imposed by the Corporation Act, being to a maximum of $2,000 for outstanding wages and $1,500 for outstanding leave (there is no entitlement for directors in respect of notice or redundancy).