It is a common arrangement in small family companies for both spouses to be directors. It is also common within these companies for one of the spouses to be responsible for managing the company, and the other to be responsible for the more mundane duties, or not involved in any way at all.
Regardless of the work that the director actually does, his or her duties and obligations are the same. This issue sometimes arises in the context of family law proceedings.
Directors are responsible for ensuring, among many other things, that the company tax returns are completed accurately and honestly each year. If a company does not pay tax, for whatever reason, there are significant financial penalties. If the parties later separate, the penalties will likely need to be paid as part of a property settlement. It is very, very difficult to argue otherwise, especially where the asset pool is modest. The director who, for example, took care of the children and the household and assumed that the tax would have been done properly can rarely argue that the director effectively running the company, who met with the accountant and told the accountant not to file the tax return, should be liable for the debt.
What can be especially crippling for separating parties who incur a company tax debt is the raft of administrative penalties and interest that the ATO seeks on top of the principal debt. If a company tax return is done, say, five years late as part of a property settlement, and tax should have been paid, then the ATO will often simply put five years worth of interest and administrative penalties on top of the bill and direct the company to pay the entire amount.
In years gone by, the ATO would write off the interest and administrative penalties if parties had the capacity to pay the principal debt straight away. The ATO is now tougher.
Readers may have seen the recent exposé on ABC’s Four Corners and the commentary in the Sydney Morning Herald in which the ATO was revealed to have been pressuring its staff into using harsh debt collection tactics against small business tax payers to raise revenue. Small business tax payers are targeted because their debts can be reasonably significant and their capacity to defend claims minimal to non-existent. This tough stance has meant that the ATO is unwilling to write off interest and administrative penalties.
If you are the director of a company, make sure you know what is going on. If you don’t, or your spouse won’t let you, you should be concerned.
The above is not intended as legal advice. You should obtain legal advice in relation to your own specific circumstances.
