New Laws Introduce GST Withholding Obligations for Residential Property Purchasers
Next week the Treasury Laws Amendment Act (2018 Measures No.1) 2018 (Cth) will come into effect, imposing new GST withholding obligations on purchasers of certain residential real property. The new measures have been designed to prevent property developers from intentionally avoiding their GST obligations, after a spate of incidents in recent times.
From July 1, purchasers of new residential premises or potential residential land will be required to remit the GST payable on the supply directly to the Australian Taxation Office (ATO). The payment will be due on or before the day on which any part of the consideration for the supply is provided, with this usually occurring at settlement. Relevantly, suppliers of residential land or potential residential land will be required to notify purchasers in writing if they are required to withhold an amount, what that amount is and when it is due to be paid. Failure to do so is a strict liability offence. Individuals who fail to provide the required notice may be fined 100 penalty units (currently $21 000), whilst corporations will be liable to a maximum of 500 penalty units (currently $105 000).
Generally, where a vendor makes a taxable supply of new residential premises or potential residential land, the purchaser will be required to withhold 1/11th of the price and pay it directly to the ATO.
However, there are some situations in which the amount to be withheld must be calculated differently.
Margin Scheme Sales
Where a property is sold under a margin scheme, the purchaser will be required to pay 7% of the contract price or price.
Mixed Supply Sales
Where a property is a mixed-supply, that is partly GST-free and partly taxable, a purchaser must pay the ATO 10% of the GST exclusive market value of the supply.
Sales with low or no consideration
The amount payable will be reduced and calculated using a reasonable apportionment of the contract price or price multiplied by the applicable rate.
Sales involving multiple purchasers
Where a sale involves multiple purchasers, who are not joint tenants, the amount to be paid will be; 7% as in the case of margin schemes, 1/11th of the contract price, or the price for their percentage of interest in the property purchased.
De Facto Director Ordered to Compensate Unpaid Supplier Following Insolvent Trading
Tremco Pty Ltd ACN 000 024 064 v Thomson & Ors [2018] QDC 101
Case Facts
The plaintiff (Tremco) was the principle supplier of waterproofing materials to a waterproofing business (Kadoe). The defendant (Thomson) was the wife of the formally appointed director of this business. In this proceeding, Tremco sought to recover compensation from the wife under s 588M(3) Corporations Act 2001 (Cth) for losses suffered in relation to unpaid debts.
The debt arose from unpaid invoices beginning in March 2010. In November 2010, the defendant’s account was put on hold. By December 2010, the amount owing to the plaintiff totalled $146,410.20.
In 2015 Tremco brought proceedings against Kadoe for the outstanding debts and obtained a judgment in their favour. Subsequently, Kadoe failed to comply with a statutory demand based on the judgement and was wound up in insolvency on 29 April 2015. The defendant’s husband was made bankrupt in June 2015. Tremco sought compensation for the expenses incurred in this process.
Legal Principles
Section 588M(1) sets out several conditions which must be satisfied before compensation under section 588M(3) can be recovered. The condition in dispute in this case was s 588M(1)(a), which imposes a requirement that, in order to recover compensation, a person (a director) has contravened s 588G(2) or (3) in relation to the incurring of a debt by a company. The key question was therefore whether the defendant was a director within the meaning of director as defined in s 9 of the Act during the alleged period of insolvent trading.
Tremco argued that the defendant was a de facto director of the company due to her involvement in the setting up of the company in 2009 and subsequent management position in the company. The defendant disputed this claim arguing that the company was supposed to be incorporated as a trust. The defendant’s argument was that the setting up of the trust had failed and hence the company had not been trading in its own right.
In support of their claim that the defendant was a de facto director, Tremco pointed to several factors. First, that by the defendants own account, she had been responsible for setting up the Company and the Trust. Second that the defendant had significant involvement and control over the day to day operations of the business including a self-identification as the ‘General Manager’.
In response to Tremco’s assertions, the defendant argued that she had only been a conduit on behalf of her husband in setting up the trust and in any event the incorporation of the trust had failed. In regard to her involvement the defendant relied on the case of Re Swan Services Pty Ltd (In Liquidation) [2016] NSWSC 1724, arguing that her role was only as wife who became involved in the affairs of the company to address the emergency of the invalidity of the Trust. This claim was rejected on the basis that her involvement went far beyond emergency assistance and involved conducting the dispute over the alleged invalid trust for the Company over many years.
Decision
Porter DCJ QC held that the plaintiff was entitled to recover for loss or damage under s 588M. His Honour found that the defendant was a de facto director of the company at all times due to the system of shared management; the husband was responsible for onsite activities whilst the wife was responsible for the operational and administrative affairs of the company. His Honour, in reference to the authority of Grimaldi v Chameleon Mining NL (No 2) (2012) 287 ALR 22, noted the presence of several factors leading to this decision:
- the defendant had independent authority to negotiate and manage matters of importance on behalf of Kadoe and could go further and bind Kadoe in relation to those matters;
- The defendant’s husband had little, if any, oversight or involvement in those matters and largely left executive decision making to her in many areas.
With the question of the defendants status settled, his Honour found that the defendant was in a position to determine the solvency of the business and had reasonable grounds to suspect the company was insolvent during the relevant time period.
Federal Court: Gated Housing Renders Personal Service Impractical
In the recent case of bCode Pty Ltd (in liq) v Holford [2018] FCA 798 the court was required to consider whether an order for substituted service may be granted where multiple attempts to personally serve a notice have been unsuccessful.
The case involved bCode, a mobile technology company, who had unsuccessfully attempted to serve documents on Troy Holford on numerous occasions. Mr Holford lived within a gated community in Sanctuary Cove. The community was monitored by a security team, and thus in order to gain access to Mr Holford’s residence, one was required to first contact the security team via intercom, who was to then contact the residence for access approval.
During the trial, Mr Russ, a commercial agent for bCode, gave evidence that on four occasions, he attempted to serve notice at the Sanctuary Cove address. Specifically, Mr Russ contended that on the first occasion, the guard told him that Mr Holford was abroad, however gave permission for Mr Russ to enter the premises and leave the documents with his son. Mr Russ declined this offer on the basis that he was required to personally serve the notice on Mr Holford.
When he returned a third time, Mr Russ once again contacted the security guard who subsequently phoned Mr Holford’s premises and spoke with a woman, who informed him that Mr Holford was still overseas. Mr Russ notified the guard that he now had authorisation to leave the documents with a resident at the address, however when the guard called back, there was no answer at the premises. On both other occasions Mr Russ was notified that there was no answer at Mr Holford’s address.
In considering bCode’s application, the court was required to determine whether personal service was ‘not practicable’ pursuant to r10.24 of the Federal Court Rules 2011. In doing so, the Gleeson J contended ‘that it is impracticable to effect personal service on Mr Holford since he resides in a secure housing estate where access is only permitted by security guards authorised by a resident’.
The court also heard evidence from bCode’s solicitor Laura Scotten, who verified that; Mr Holford is the owner of the Sanctuary Cove address, that his address in ASIC records is the Sanctuary Cove address and that he is the director and shareholder of Holford Properties Pty Ltd, which lists its principal place of business as at the Sanctuary Cove address. Ms Scotten also gave evidence that in late February 2018, Mr Holford had sent emails from a known email address.
According to this information, Gleeson J submitted that pursuant to the Federal Court Rules 2011, it was appropriate to substitute an alternate method of service. It was ultimately held that notice may been served on Mr Holford by post to the Sanctuary Cove address and by transmitting the documents to his email. Her Honour contended that the documents will be taken to be served seven days thereafter.
Federal Budget Introduces Anti-Phoenixing Measures
In the recent federal budget, the Government has vowed to combat illegal phoenix activity by reforming existing corporations and tax laws and granting the Australian Taxation Office additional power. Accordingly, the proposed changes are credited as complementing the work of the Government’s Phoenix, Serious Financial Crime and Black Economy taskforces, with Federal Treasurer Scott Morrison asserting they will ensure small businesses “don’t get ripped off by other businesses who deliberately go bust to avoid paying their bills.”
Illegal phoenixing occurs when a company’s directors allow a business to collapse in order to avoid paying creditors, either through directors resigning or through the business going into administration. All too often the practice results in customers not receiving goods or services they have paid for, lost payments for small businesses and lost wages and entitlements for affected employees. Ultimately, it has an adverse impact on the economy, with illegal phoenix operators gaining an unfair advantage over honest businesses.
Under the proposed budget, the government has allocated $40million to be spent over the next four financial years, introducing new phoenix offences to target those who conduct or facilitate illegal phoenixing. Specifically, these measures endeavour to prevent directors from backdating their resignations, limiting the ability of directors to resign and restricting the ability of related creditors to appoint or remove external administrators.
Moreover, it will expand the ATO’s power to retain refunds where there are outstanding tax lodgements and will extend the Director Penalty Regime to include GST, luxury car tax and wine equalisation tax, making directors personally liable for the company’s debts.
