DPN to cover GST – directors & shadow directors exposed!


Posted By on 9/08/19 at 12:16 PM

The ATO has, following the passage of amending legislation (see below), recently extended its ability to hold a rogue director accountable for unpaid tax liabilities of their company (which would include a company acting as trustee of a trading trust). This has been achieved through the strengthening of the suite of recovery legislation at its disposal. It’s illustrative of the ATO’s ever-broadening but proper focus on tax compliance. The “Phoenix Industry” has been allowed to flourish for far too long. In this article, we explore the sweeping implications of Director Penalty Notices (DPNs), particularly with respect to increasingly common ‘shadow director’ arrangements and how innocent but inadvertent directors can be exposed to this fiscal fracas.

By Jack Stuk (National Tax Principal and President NTAA) and Angelo Mazzone (Trainee Lawyer)

Under the long standing PAYG withholding scheme and its predecessors, the Income Tax Assessment Act 1997 (ITAA 1997) requires companies to withhold a portion of employee wages to meet tax liabilities. Similarly, companies have an obligation to pay a superannuation guarantee charge (SGC) under the Superannuation Guarantee (Administration) Act 1992 (SGA Act). Failure to meet PAYG and SGC obligations by the relevant respective due dates exposes company directors to personal liability equal to the unpaid amount, unless there has been proper reporting and the timely placement of the impecunious company into liquidation or administration or establishing, what case law has demonstrated to be difficult to prove, statutory defences.

On 13 February 2019, the Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill 2019 (Phoenixing Bill) was introduced into Parliament. Provisions in Schedule 3 of the Phoenixing Bill propose to extend existing director liability and DPN provisions for unpaid PAYG withholding amounts and SGCs to GST debts. As a result, directors of both public and private companies will also become personally liable for outstanding GST debts in the event of non-compliance, generating even greater disincentive for directors to defer GST payments.

The House of Representatives was dissolved on 11 April 2019 ahead of the Federal election. Thus, all Bills that had not passed Parliament at that time lapsed, including the Phoenixing Bill and will need to be re-tabled if the newly elected coalition Government is to proceed with the measures, which appears likely.

The status of the relevant legislation is provided below:



Bill Status
Treasury Laws Amendment (Combatting Illegal Phoenixing Bill) 2019 Lapsed in House of Reps and has not yet been reintroduced.
Treasury Laws Amendment (2018 Measures No 4) Act 2019 Given Royal Assent on 1 March 2019 as Treasury Laws Amendment (2018 Measures No 4) Act 2019.


Navigating amendments to the Director Penalty Notice (DPN) regime

A DPN is a notice issued by the ATO making a director of a company personally liable for certain tax debts of the company. As discussed above, the existing DPN regime applies to PAYG and SGC liabilities but is expected to extend to GST liabilities.

The Treasury Laws Amendment (2018 Measures No 4) Act 2019 revised the DPN regime as follows:

  • Previously, ‘non-lockdown‘ DPNs were issued to company directors who had lodged business activity statements, instalment activity statements and/or superannuation guarantee statements within 3 months of the due date for lodgment but had not paid PAYG withholding and/or SGC debts.
  • Lockdown‘ DPNs were issued to company directors where the company failed to lodge business activity statements, instalment activity statements and/or superannuation guarantee statements within 3 months of their due lodgment date.
  • As of 1 April 2019, superannuation amounts must be reported by their due date, that is, within 28 days of the end of each quarter as opposed to within 3 months from the due date. The Bill amends reporting timeframes for the superannuation aspect of the DPN regime only, while the existing ‘3-month rule’ continues to apply to PAYG scheme.
  • Directors still have 21 days to take certain actions (such as payment, negotiated payment plan, administration or windup) to have non-lockdown DPNs remitted. Meanwhile, as the name suggests, a lockdown DPN ‘locks down’ on directors and can only be expunged by full repayment of the debt or reliance on one of the difficult to establish defence provisions.

When the regime extends to unpaid GST debts (assuming the Phoenixing Bill is reintroduced and passed), a DPN will be issuable where the outstanding amount is not paid by the due date. This is will have a significant impact on a director of a financially challenged trading company. In practice, such companies are even more likely to have GST liabilities in arrears than PAYG and SGC debts and potentially much larger amounts in high-volume low-margin enterprises.

Directors hiding in the ‘shadows’ beware

Assuming the Phoenixing Bill receives Royal Assent, where a company has an outstanding GST, PAYG or SGC liability, every director of the company has a personal obligation to ensure it is paid. Further and importantly, if the company is unable to meet its liabilities or relevant estimates of it as they fall due, the directors have an obligation to rapidly and cogently consider whether the company is insolvent and if so, should be placed into administration. This duty extends to all company creditors generally, not just the ATO. Section 588G of the Corporations Act 2001 imposes a duty on directors to prevent insolvent trading. If the company is not insolvent, a payment proposal should be formulated and put to the ATO with a view to reaching a sustainable repayment agreement of all such arrears, including the timely payment all prospective taxation liabilities of the company. Other solutions may also exist (eg Deed of Company Arrangement). However, such discussion is beyond the scope of this article.

The duty to prevent insolvent trading applies if:

  • the person is a director of a company at the time when the company incurs a debt; and
  • the company is insolvent at that time, or becomes insolvent by incurring that debt; and
  • at that time, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent.

To be, or not to be (a director), that is the question.’ Shakespearean philosophy aside, it is important to consider the audience to which the duty to prevent insolvent trading applies. If you impulsively retorted ‘it applies to directors’ at your laptop, smart phone, computer monitor or tablet, you’re correct, well partially at least – but who is a director?

  • Section 9 of the Corporations Act states that, unless the contrary intention appears, a director also includes a person who is not validly appointed as such if:
    • they act in the position of a director (de facto director);
    • or the directors of a company or body are accustomed to acting in accordance with the person’s instructions or wishes (shadow director).

Note, the Taxation Administration Act 1953 (TAA) extends the application of the definition of a director under the Corporations Act 2001 to the PAYG and SGC, and shortly, it is likely to cover GST schemes.

Unbeknownst to many, a company may also be a shadow director of another organisation despite not being a natural person (Standard Chartered Bank of Australia Ltd v Antico (1995) 131 ALR 1).

At this point, we must turn to case law to determine the circumstances in which a person may be a shadow director. Per Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd [2010] NSW 233 (Buzzle):

  • a person is not a shadow director merely because they impose conditions on the commercial dealings of the company, with which the directors feel obliged to comply;
  • there must be a connection between the instruction or wishes issued by the person and the actions of the directors. It is not sufficient if the directors would have acted in accordance with the person’s wishes irrespective or being instructed to do so;
  • generally, for the directors to be ‘accustomed to act’ in accordance with the relevant instructions of a third party, ‘habitual compliance over a period’ is required (Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180);
  • the ‘governing majority’ of directors must be accustomed to collectively acting on the shadow director’s instructions or wishes. However, the instructions or wishes of the shadow director need not be conveyed directly to all directors (Re Lo-Line Electric Motors Ltd [1988] BCLC 698; Kuwait Asia Bank v National Mutual [1990] 3 All ER 404);
  • consider whether the directors exercised independent judgment in decision-making. By contrast, if the directors blindly follow the wishes or instructions of a person without turning their minds to the issues in question, it is more likely that the person will be treated as a shadow director.
So, what’s the significance? Picture this …

To aid our understanding of the significance of shadow directorship in the context of the recent legislative changes, it is helpful to consider a working example.

Luke is the sole director and shareholder of a Pty Ltd company conducting a small family business as a paper wholesaler. Aside from his business, Luke does not have any assets of significant value to his name. Luke’s father, Peter, who started the business, is not formally appointed or listed as a director of the company at ASIC, but has exerted a considerable degree of control in the management of the business because Luke is still learning the ropes. Peter has $500,000 in his savings account, which he intends to live off in retirement.

With the help of Luke, Peter organises the manufacture of paper through various contractors. Peter has final say over where the bulk paper is sourced and other major decisions.

Recently, Luke’s business has taken a turn for the worse because of the emergence of new competitors who continue to undercut him. The business is also encountering liquidity problems because energy overheads continue to increase.   Luke and Peter are forced to defer Company GST payments of $250,000 to keep the doors open.

The due date passes, leaving the GST unpaid. The ATO is aware that Luke does not have any assets, so it decides through the liquidator it has appointed over the company as the petitioning creditor, to pursue not only Luke but also Peter for the debt comprising the GST arrears. The liquidator’s lawyers argue that he is a shadow director of the company because Luke is accustomed to acting in accordance with his instructions.

Assuming Peter is a shadow director, under the new DPN regime and proposed Phoenixing legislation, he would be subject to a lockdown DPN and personally liable for the amount equal to the GST debt assuming the GST was not properly reported. Peter now faces the prospect of losing half of his hard-earned retirement fund to pay the debt. The ATO may also claim that he breached his duty to prevent insolvent trading as a director of the company, exposing him to further liability.

The Commissioner must be satisfied that it is fair and reasonable for Luke and Peter to pay the outstanding tax liability. Proceedings to recover the outstanding $250,000 cannot be commenced until 21 days after the DPN is issued. Luke and Peter are jointly and severally liable for the debt and will each owe the same amount under the DPN in accordance with s 269-45(2)(b) of the TAA.

Once the Phoenixing Bill is passed, the ATO will be able to issue notices of estimated net amounts of GST to businesses like Luke’s and Peter’s that have not lodged a return. The estimation will be due at the GST lodgment due date. Previously, it was suspected that the DPN regime may apply retrospectively to GST liabilities dating backing to 8 May 2018, being the date of the Budget announcement. However, s 22(b) of Schedule 3 of the Phoenixing Bill now clarifies that the amendments apply in relation to GST instalments for quarters starting ‘on or after the commencement’ of the legislation.

The moral of the story – time to be proactive

The above case study depicts a commonly encountered problem, particularly in small and medium sized businesses. To mitigate the risk of non-compliance, we suggest a comprehensive review of:

  • all director and employment relationships to ensure that key personnel understand the responsibilities and obligations pertaining to their roles. This ought to include reconsideration of the business plan, corporate governance structures, asset protection and decision-making protocols of the organisation. In particular, investigate if all PAYG, SGC and GST obligations are up to date. Be sure to understand how the recent changes impact corporate clients and their business;
  • the liquidity of the company and whether it is financially prudent for the business to continue trading to meet pressing liabilities. Be sure to consider the short and long-term viability of the business and, although difficult, whether insolvency is the right option. We believe that consultation with appropriately skilled legal, financial and insolvency professionals is essential in formulating this existential decision.

The Phoenixing Bill measures are being called draconian and the proverbial sledgehammer to crack a walnut, but that does not excuse directors from being aware of their potential effect. The reintroduction of the Bill needs to be closely watched.

This article first appeared in Thomson Reuters Weekly Tax Bulletin (Issue 33, published 2 August 2019).

KHQ Lawyers - Jack Stuk

Jack Stuk Principal Solicitor

Jack is a highly skilled and experienced taxation lawyer, proficient in advising on complex tax issues for high net worth individuals, and across business, commercial and estate matters.

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