Director's Penalty Notices: When to Act
22 September 2016
Anyone who is appointed as a Director, or who is considering being appointed a Director of a company, should be aware of the Australian Taxation Office's ability to issue a Director Penalty Notice which makes a Director personally liable for the company's unpaid Pay As You Go withholding or Super Guarantee Charge (SGC) amounts.
Known as the Director Penalty Regime, the aim is to ensure Directors cause the company to comply with certain taxation and superannuation obligations in respect of both lodgement and payment.
What is the Director Penalty Regime? The Director Penalty Regime allows the ATO to issue a Director with a notice that they are personally liable for the company's:
- Unpaid PAYG withholding amounts; and
- Unpaid SGC obligations applicable from and including 30 June 2012.
There is a lockdown provision that will apply to a Director if the company's PAYG or SCG debt:
- Is older than 3 months; and
- Was not reported to the ATO within 3 months of the lodgement due date.
In these circumstances, the Director's personal liability cannot be avoided.
If the PAYG or SCG debt was reported to the ATO within 3 months of the lodgement due date, but not paid, the lockdown provision will not apply and the Director may take a number of steps to deal with the notice and avoid personal liability.
What is a Director Penalty Notice?
A DPN is issued by the Tax Commissioner to a director to recover the director penalty (being the amount of the company's outstanding PAYG withholding and SCG obligations). It is this notice that makes the Director personally liable for the company's debt.
The Director has 21 days after the DPN is issued to act before the ATO commences proceedings to recover the debt. A DPN will be posted to a Director at the address listed with ASIC. There is no defence if the address is incorrect or if a Director does not receive the notice – it is deemed to be served when it is posted and the 21 day timeframe commences on the date it is posted.
What to do if a DPN is received?
A Director has 21 days to comply with the DPN. If a notice is received, it is important to act promptly.
The options available will depend on whether the company has complied with its taxation lodgement obligations – ie whether the company's PAYG and SGC were reported to the ATO within 3 months of the lodgement due date.
1. Tax Lodgements made within 3 months
The options available to a Director in these circumstances are to:
- Arrange for the company to pay the debt to the ATO; or
- Place the company into external administration.
2. Lockdown situation - Failure to comply with Tax Lodgements
Where the company has failed to comply with its lodgement obligations and report its PAYG and SGC debts to the ATO within 3 months of the lodgement due date, the only option available is to arrange for the payment of the debt in full. If the company is unable to pay the debt in full, the Director will be personally liable for the debt.
Does this apply to all Directors?
These provisions apply to all Directors including newly appointed Directors, non-executive Directors and, in certain circumstances, former Directors.
A newly appointed Director can become liable for unpaid liabilities of the company that were due prior to their appointment. New Directors have 30 days from their appointment before they become liable for penalties equal to:
- All of the company's unpaid PAYG withholding liabilities; and
- All unpaid SGC liabilities
A newly appointed director will not become liable for the company's PAYG and SGC debts that were due prior to their appointment if, within 30 days of their appointment, the company:
- Pays the full amount outstanding; or
- Is placed into external administration
If you are considering a new appointment as a Director of a company, it is imperative to make enquiries prior to your appointment to ascertain if the company has any outstanding taxation lodgement or payments to avoid becoming personally liable for these debts.
These provisions also highlight the need for all directors of a company, even non-executive directors, to be vigilant and ensure that the company meets its tax reporting and payment obligations.
It is vital that Directors ensure their company is complying with its taxation lodgement and payment obligations to avoid the risk of becoming personally liable for the company's debt. If the company is experiencing financial difficulty and is unable to meet its obligations to the ATO it is important to act immediately and proactively and obtain professional advice about the best course of action in your circumstances.
If you have already been issued a DPN, it important to obtain advice as soon as possible (and prior to the expiration of the 21 day period) about the best course of action in your circumstances.
Acting promptly will not only ensure you fulfil your duties as a Director and minimise the risk of becoming personally liable for the company's debt to the ATO, but allow the greatest possible likelihood of being able to achieve a successful restructure and save the business and company.
Contact Rodgers Reidy now for a confidential discussion in relation to your business circumstances.
1. ATO - Director Penalty Regime - guide for Directors
2. ASIC Information Sheet 42 - Insolvency: A guide for directors