Did you know that company directors may potentially become personally liable for unremitted Pay As You Go (PAYG) deductions and Superannuation Guarantee Charges (SGCs)?
The Australian Taxation Office (ATO) has significant powers to recover a company’s unpaid liabilities personally through its directors and may issue a Director Penalty Notice (DPN).
This article focuses on the DPN regime and the options directors have in the event that they receive a DPN.
Why does the ATO have these powers?
The DPN regime was introduced to prevent companies and their directors from avoiding their PAYG and SGC liabilities. The laws administering the DPN regime have over the past been strengthened to reduce the occurrence of phoenix activities which were prevalent under previous laws.
A phoenix activity occurs when a company is deliberately wound up for the purposes of its director/s avoiding personal liability, after having been issued with a DPN.
The ATO’s recovery options are now broader and linked to the company's reporting obligations.
Directors in receipt of a DPN face personal liability and should act immediately.
The DPN regime
A company is required to report its PAYG and SGC liabilities periodically, with the frequency depending on the size of the company.
The ATO must issue a DPN before it can use any recovery options against a director. These include issuing garnishee orders to third parties, offsetting of personal tax credits against the director penalty and initiating legal proceedings for recovery of the debt.
Options available to avoid personal liability
The options available to directors for avoiding personal liability of a company’s unpaid PAYG or SGC liability will depend on the circumstances under which the DPN issues.
If the unpaid amounts of PAYG or SGC are reported within three months of their due date, a director has 21 days from the date of the DPN to have the director penalties remitted (cancelled) by:
If the unpaid amounts of PAYG or SGC are reported more than three months after their due date, or are unreported, then the only option available for remitting the penalty is by paying the liability.
In such cases, a director cannot avoid personal liability for those amounts by placing the company into administration or liquidation. The only option available where the ATO has commenced proceedings to recover a company's liability that is unpaid and unreported after three months, is for a director to cause the company to pay the debt or to pay it personally.
Failure to report a PAYG or SGC obligation may result in the ATO making an estimate of the unpaid and overdue amount to which the DPN regime will apply.
A company may enter into an arrangement with the ATO to pay the debt in which case the ATO will not commence personal recovery action against a director. However, the ATO may use a director’s personal tax credits to offset the company debt.
Directors in receipt of a DPN should seek urgent advice on their available options to avoid personal liability or to lodge a defence.
What are the defences against director penalties?
Directors may not be liable for a director penalty if they can establish one of the available statutory defences. These include:
Further, a director may not be responsible for a penalty with respect to an SGC liability if it can be shown that the company took reasonable care in applying the provisions of the Superannuation Guarantee (Administration) Act 1992 in a way that could be reasonably argued as consistent with that Act. This recognises that there can be some uncertainty about SGC liabilities, especially relating to employee entitlements. Note though that there is no corresponding defence for PAYG withholding obligations.
The ATO uses the company address listed on ASIC public records and directors are responsible to keep this information current. Consequently, claiming that the DPN was sent to the wrong address will not be an effective defence.
Incoming and outgoing directors
If you resign from your position as a director, you may still be liable for a DPN equal to any unpaid PAYG or SGC due prior to your resignation. You may also be liable for amounts falling due after you resign, if the first PAYG withholding event in the reporting period occurred before you resigned or for SGC liabilities accrued in the quarter ending before resignation.
Incoming directors should carefully check the company’s financial records for any unpaid PAYG or SGC liabilities to ensure they will not attract a DPN upon their entry to the company.
The laws governing the DPN regime have been strengthened in the past to provide the ATO with greater powers for the recovery of company PAYG and SGC obligations. It is now easier for directors to be held personally liable for these debts.
Directors should ensure their financial management systems allow for PAYG and SGC contingencies and their company reporting requirements are regularly reviewed and maintained. This may require the assistance of a professional to ensure that personal liability, penalties and interest, wherever possible, are avoided.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9238 0060 or email firstname.lastname@example.org.