2011 Federal Budget further extends directors' tax obligations

For many, the Federal Budget handed down by Treasurer Wayne Swan in May was considered to be all about tightening the purse strings to deliver that magical surplus by 2012/13.

For company directors however, there were some announcements that may make your life more difficult as they open the door to increased personal liability to tax exposures of the company. These are important changes that have not received the level of press coverage expected.

Whilst these changes were announced under the guise of protecting the economy from “phoenix company” activity, we have come to expect that the legislation for these announcements will be so broad that every professional company director will need to be aware of them as part of their director’s duties . An example of such broad legislation is Division 255-D of ITAA97 that was introduced following the 2010 budget. Such legislation gave the Commissioner of Taxation discretionary powers to seek security over an existing or future tax-related liability where he thought it would be appropriate. The security that the Commissioner could request included a bond, or deposit or any other means determined by the Commissioner – clearly very broad powers!

The changes announced during the 2011 budget to counteract “phoenix company” activity included (with effect from 1 July 2011):

• An extension of the director penalty regime to make directors personally liable for their company’s failure to pay employee superannuation
• The Commissioner of Taxation will be able to commence recovery action against directors under the director penalty regime that remain unreported after three months of becoming due. Of concern is that the Commissioner need not provide a 21 day grace period; and
• Directors and associates of directors may 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.

Let’s hope that such amendments are limited only to those directors and taxpayers with a history of phoenix activity and not more broadly to all directors.

On another matter, one of the expected topics of the budget that was not announced was the disclosure of uncertain tax positions in a company’s financial statements (similar to FIN48 in the US). The financial statements may be required to disclose each uncertain tax position, taking the extent of the uncertainty into account when measuring the asset or liability by using a probability-weighted-average amount of all possible outcomes.

Although such disclosure in the company’s financial statements may be required in the future, the ATO has certainly highlighted the issue. In the week following the budget, the ATO released a “Draft Reportable Positions Schedule”, which they propose as a schedule to the 2012 company tax return for large businesses. The intention of the proposed schedule is allow large businesses to disclose contestable and material tax positions with the trade-off being the provision of faster and clearer tax advice by the ATO. Initially such a schedule will only be required by “higher risk” taxpayers, but the expectation is that all large businesses will eventually need to disclose to the ATO any uncertain position.

The announced changes, as well as the potential future disclosure of uncertain tax positions, will place additional pressure on directors to ensure that the company’s tax risk management policies and systems are up to date. Systems should ensure there are appropriate controls over operations, transactions, and all financial statement and tax return disclosures so that tax liabilities and exposures are known and understood.
If the regulatory trend we have seen from this budget continues, personal liability for company directors will continue to be a risk.

If you would like to discuss this issue, please contact me or your usual Grant Thornton advisor or the author of this article.

Tim Hands
Associate Director, Tax
T  +61 7 3222 0200
E  tim.hands@au.gt.com