There has been a great deal of publicity about recent amendments to the Tax Act which considerably lifts the burden on directors of companies in relation to their obligations to remit to the Australia Taxation Office the PAYG and Superannuation deducted from employees.
In a nut shell, these amendments which were promoted to avoid so called “Phoenix Activity” may do very little. The amendments remove the ability of directors to avoid personal liability by placing the company into administration where BAS returns are outstanding. The amendments also remove the ability for directors to claim the benefit of unremitted deductions on their individual returns. The provisions are also widened to include superannuation contributions.
The real problem now is that many directors are unaware of their obligations and the Australian Tax Office (ATO) is not issuing the Director Penalty Notices that it should if it were to diligently carry out its duties in collecting all outstanding taxes. This means in relation to directors of companies that are failing, they will probably continue to put their head in the sand and will wait until the absolute last minute. Importantly, it still means that the lack of action by the ATO has the effect of propping up the companies that would otherwise fail.
It appears that this situation is not unique to Australia. John Moulton, Chairman of a private equity firm, Betta Capital LLP believes that in the United Kingdom failing companies have not been allowed to go bust and that the “Darwinian Element” is not working. It means that bad business models are allowed to keep operating and as a consequence, productivity is reduced. Moulton demonstrates that in the mid 1990’s where the British economy had a growth rate of approximately 3%, insolvencies or company failures were running about 1.6%. He says that today insolvencies are running only at about .4% in circumstances where there is virtually no growth. Interestingly he demonstrates that prior to the downturn, countries with the lowest rates of insolvency included Portugal, Ireland and Greece, whereas Germany and Norway had relatively high business failure rates.
This demonstrates the importance of allowing nature to take its course in the business environment without government interference. It is an unfortunate myth that if the ATO goes easy on business during tough times, it is a good thing for the economy. The opposite is actually true. Propping up struggling businesses only disadvantages the rest by causing unfair competition.
Michael G. Jones – Jones Partners, www.jonespartners.net.au
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