Starting a company is easy. Too easy almost. Just be over 18, not bankrupt, fill in a form, pay the fee and you’ll have a Pty Ltd company registered with ASIC (Australian Securities and Investments Commission) in about 10 minutes.
There’s no knowledge requirements, no tests, nothing telling you before you click the button “by becoming a director, you are held personally liable for certain debts and it’s possible that you can amongst other things lose your house, your marriage, and become bankrupt. Are you sure you understand this and want to continue?”
There’s more warning when ordering a pizza via a mobile app that they’ll track you down and kick in your door to get paid for the $5 pepperoni you ordered but didn’t go pay for, than there is from ASIC when starting a company.
And once you’ve started the company you can go out, and hire people (who go out and get mortgages based on the premise that you’ll pay them), sign leases and commit yourself to a whole bunch of stuff, wrapped in a whole bunch of regulation and legal responsibilities. Not being able to fulfil these obligations is where the risk lies.
To understand what risk a director is taking, we must first look at what their responsibilities are. ASIC does, if you go looking for it, have a good summary of this here, and if you talk to any decent business accountant, or tax adviser they can tell you what you’re getting into. But my point is, you have to go looking, and you have to know that you have to go looking, otherwise, no one will ever tell you until its too late.
The responsibilities ASIC talk about boil down to Corporations Act 2001 requirements (this act by the by has about 1600 clauses, so yeah, there’s a lot of requirements), but there are also taxation, fair work, workplace health and safety, and myriad other legislative responsibilities that can hit you over the head, like QBCC regulations for builders, Tax Agent Board requirements for tax agents etc.
So there’s a bunch of responsibilities, but what happens if you don’t meet them?
That depends on the infringement, but ranges from monetary fines to bankruptcy to jail, not mentioning the strain this puts on personal relationships and finances.
People often think because they have a company, their personal assets are safe, after all, isn’t that what a company is for? In reality it’s not that easy.
Yes, there is a ‘corporate veil’, and a company is considered a natural person under the law, meaning it can be sued, and can sue. But as a director, you are still bearing personal risks.
As mentioned in my blog on Business Structuring if you’re negligent, no structuring is going to help you. But even if you’re not negligent in your duties, there are pertinent financial risks are under Income tax law, and administered by the ATO through the Director Penalty Regime that can really make you pay.
This regime makes directors personally liable for PAYG Withholding (PAYGW – that’s the tax an employer withholds on employee’s pay), Superannuation Guarantee Charge (SGC) obligations (super, unpaid super, and unpaid super penalties and interest) and from 1 April 2020 GST.
It doesn’t matter if you’re a new director, say you just bought the company that owned a business, once you become a director, you have 30 days before you become liable for PAYGW and SGC under the DPN regime, even for amounts owing from before you were appointed a director to sort it out.
There are only 3 actions new directors can take to avoid becoming liable, if within 30 days of your appointment the company;
- Pays the amounts in full,
- Appoints an administrator, or
- Begins the wind up process of the company within the meaning of the Corporations Act 2001.
The same is the case, if you are no longer a director. That is, you can’t resign having accrued these amounts and expect to walk away. If there are amounts outstanding whilst you were a director, you’re on the hook (and in my opinion, rightfully so).
The kink in this law though, is that if you become a director, then you find out there are unpaid amounts, you can’t then just resign to absolve yourself. You’re personally on the hook for these amounts, and you can only absolve yourself via the 3 methods outlined above.
So if you’re considering becoming a director, say someone has asked you/hired you to be a director, or if you’re buying the shares in a company to buy a business (and you appoint yourself a director after settlement), you need to do your due diligence of the company financials before you’re appointed a director of the company.
To extend these rules even further, and prevent the technical loophole of not actually being correctly appointed as a director with ASIC i.e your spouse is a director on the company register with ASIC, but you run the company, make decisions, hire/fire, enter contracts etc and the market place believes you are a director, then you can also be drawn into these provisions alongside your spouse. This is because the definition of “Director” for DPN purposes, takes the meaning from the Corporations Act 2001, which includes “shadow” directors.
So what can you do to minimise these risks? In my opinion it boils down to good financial management.
You need to have your finger on the pulse of your company finances. Good bookkeeping isn’t expensive. Not having good bookkeeping is. Having up to date, relevant and reliable data is the key, both in terms on reporting on what has happened, but also in terms of cash flow forecasting.
This way you can see when cash flow is getting tight and when you may not be able to meet your ATO liabilities. This is the time to do something about it. Struggling to pay your Business Activity Statements (BAS) and superannuation on a regular basis is one of the earliest warning signs your business is going to fail. If you’re going to fail, fail early. It’s way cheaper in the long run for everyone involved.
You also need to ensure your ATO lodgements are done on time. You might think, ‘I don’t have cash to pay this BAS so I won’t lodge it” is going to work.
It is not going to work. That is one of the most common mistakes businesses make with the ATO
Yes, you will trigger a debt with the ATO, but this is far better than not lodging. Not lodging makes things worse.
And for the sake of completeness. Did you know that if you don’t pay superannuation on time, you can’t just make it up later. You are in fact suppose to submit a superannuation guarantee charge form to the ATO within one month of the date the super was due and pay interest and administration penalties. No, your business accountant never told you that? Hmmm, maybe it’s time you got a new one….
Look, I know accountants aren’t always the most conversational people around, but they do know stuff (well some of us do). If you’re struggling to keep up with ATO payments, or suppliers or things are getting tight, or your worried your assets are exposed, call your tax adviser, don’t turn a blind eye to this. It’s real and it’s happening. Good business accountants (like us) know how to help. If your’s can’t help you, what the hell do you pay them for?