Where a buyer commences to hold all of the interests in a company carrying on a business (including a company acting as trustee of a trust), they are highly likely to be appointed as a director of that company.
Although the holding of this position in itself does not make the director personally liable for the debts of the company, there are two types of tax debts that are major exceptions to this rule, being PAYG withholding (‘PAYGW’) and compulsory employee superannuation or superannuation guarantee (‘SG’).
That is, the directors, at any given point in time, can be made personally liable for any PAYGW or SG outstanding at that time, even if an individual was not a director at the time the debt was incurred.
Therefore, a key component of the due diligence process undertaken by a potential purchaser should be an assessment of whether the trading entity is up-to-date with its PAYGW and SG obligations. As part of this, a potential buyer should also consider whether any ‘contractors’ to whom payments were made would be seen as employees in the eyes of the ATO, as this could give rise to PAYGW and SG problems in the future.
The above also highlights the fact that the buyer will ordinarily want the vendor to provide some kind of indemnity in relation to the buyer’s PAYGW and SG exposure.
Note also, however, that the ‘old’ directors do not cease to have exposure to unpaid PAYGW and SG. That is, both the ‘old’ and ‘new’ directors are all jointly and severally liable for these debts. This position does not alter even if a director resigns before the due date for payment of a relevant amount to the ATO.
It should be noted that it represents just one of the issues that should be considered when deciding whether to purchase a business or the entity carrying on a business.
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