Retail series: When a director can be left holding the can
20 June 2019
There are continued reports that the Australian Retail industry is struggling as shoppers move from bricks and mortar retail stores to the web for their shopping. There have been a number of major retail insolvencies in the past few years including Toys R Us, Dick Smith Electronics, Marcs and David Lawrence fashion stores. Below is a link to an article on ABC News which goes further into detail about the recent struggle of small businesses.
Directors of companies within the retail industry - even new directors - can be held personally liable for a company’s superannuation or Pay As You Go (PAYG) withholding tax debt that hasn't been reported and paid on employee wages within three months of falling due.
The ATO can seek to enforce such debts by issuing a Director Penalty Notice.
What is a Director Penalty Notice (DPN)?
A DPN is issued by the Tax Commissioner to a director to recover the amount of the company's outstanding PAYG withholding and SGC obligations.
What should you do if you are issued a DPN?
Assuming the SGC and PAYG debts have been reported within three months of the due date, the Director has 21 days after the DPN is issued to act before the ATO can commence proceedings to recover the debt personally from the director.
A DPN is sent to a director at the address listed with ASIC - it is not submitted to the accountant. 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. It is crucial that directors keep their address details current with ASIC.
What to do if a DPN is received?
As a director has 21 days to comply with the DPN, 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 withholding tax and SGC were reported to the ATO within 3 months of their lodgement due date.
1. Tax Lodgements made within 3 months: Your options 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 DPN can be enforced and the director may become bankrupt if payment cannot be made..
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 company debts that were due prior to their appointment. They have 30 days from their appointment to avoid becoming liable for penalties, if the company:
Pays the full amount outstanding PAYG withholding or SGC liabilities; or
Is placed into external administration
If you are considering a new appointment as a director of a company, it is up to you to determine if the company has any outstanding tax or super debts to avoid becoming personally liable.
Ultimately, all directors of a company, even non-executive directors, must be vigilant and ensure that the company meets its super and tax obligations.
As with all business financial challenges, the key is to act early.
The first step is to fulfil your duty as a Director by ensuring the company is complying with its taxation lodgement and payment obligations. This will minimise the risk of becoming personally liable for the company's ATO debt.
If your business is struggling with ATO debt or you have received a DPN, you should seek professional advice immediately to determine the best course of action in your circumstances.
Directors must ensure their address with ASIC is correct, to ensure action can be taken within the critical 21 day period.
Contact Rodgers Reidy now for a confidential discussion in relation to your business circumstances.