By Liyan Tay
Company directors have a responsibility to make sure that their company satisfies its payment obligations under the Pay As You Go withholding (“PAYG“) and Superannuation Guarantee Charge (“SGC”) obligations to the Australian Taxation Office. If a company does not comply with its payment obligations, company directors can be personally liable for the unpaid amounts.
Since the significant strengthening of the director penalty regime in June 2012, directors can now more easily be held personally liable for these tax debts.
The ATO has the power to issue 2 types of Director Penalty Notices (“DPNs”):
These are issued to directors that have lodged BAS or IAS within 3 months of the due date, but the PAYG withholding and SGC debts remain unpaid.
This Notice gives directors 21 days to “remit” the debt by taking one of the following actions:
- Pay the outstanding debt in full;
- Appoint a Voluntary Administrator,
- Enter the company into liquidation.
If one of the above actions is taken before the 22nd day after the DPN is issued the director will not be held personally liable under the DPN.
These are issued to directors where the company has failed to lodge its BAS or IAS within 3 month of due date. In this case the penalty permanently locks down on the director who automatically becomes liable and cannot appoint a Voluntary Administrator or Liquidator to avoid personal liability. There only way is to pay out the debt. Directors will have to pay the debt in full, enter into personal insolvency or rely on one of the defence stipulations. There is no opportunity to avoid personal liability after a Lockdown DPN is served on the director.
Consequences on Directors
The Commissioner can only commence proceedings to recover a director penalty once 21 days has expired after the DPN has been issued to a director. It is also a requirement that the Commissioner issue a Garnishee Notice in addition to the DPN when commencing recovery proceedings for SCG penalties. The Commissioner may also recover the penalty by off-setting the director’s personal tax.
In order to avoid personal liability these defences are available if the directors can establish one of the following:
The director did not take part (and could not reasonably have been expected to take part) in the management of the company during the time the liability was incurred due to illness or some other good reason.
The director took all reasonable steps (unless there were no reasonable steps the director could have taken) to ensure one of the following 3 things occurred:
- The company paid the outstanding amount; or
- Voluntary Administrator was appointed over the company; or
- Winding up of the company has begun.
Directors should comply with their obligations and ensure all lodgements are lodged on time, failing that they should act swiftly in obtaining appropriate advice in order to work out a solution if they receive a DPN. The last thing a director wants or needs is to be held personally liable for company tax liabilities.
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