In some circumstances, company directors may find themselves personally liable for their company’s taxation and superannuation debts
In March 2022, the Australian Taxation Office (ATO) advised that it will be reaching out to company directors who have not meet some reporting and debt obligations. The ATO may seek to recover these amounts from the director personally under the Director Penalty Notice (DPN) program.
What type of debts may be personally recovered?
The ATO’s advice relates to:
- Pay as you go (PAYG) withholding; and/or
- Goods and services tax (GST); and/or
- Superannuation guarantee charge (SGC)
How will the director penalty notice program work?
In respect of PAYG withholding, GST or SGC, if a company fails to meet its liability in full by the due date, directors will become personally liable for amounts equal to the unpaid amounts.
If the company has multiple directors, the amounts owed are likely to be the same for all directors.
Companies are encouraged to enter into and maintain a satisfactory arrangement with the ATO to pay the company debt, The ATO may offset director’s personal tax credits against such debts. If company debts are not under an arrangement, the ATO may pursue the director personally.
However, before the ATO can recover penalties from directors personally, the ATO must first issue a DPN outlining the unpaid amounts and remission options that are available to directors.
The ATO can resort to a number of recovery options, namely:
- Issuing garnishee notices
- Offsetting tax credits against director penalties
- Legal proceedings
What are the types of director penalty notices?
If the DPN relates to:
- An unpaid amount of PAYG withholding or GST that was reported within three months of the due date; and/or
- An unpaid amount of SGC obligation that was reported by the due date,
then, the penalty can be remitted by one of the following:
- Paying the debt;
- Appointing an administrator under section 436A, 436B or 436C of the Corporations Act;
- Appointing a small business restricting practitioner under section 453B of the Corporations Act; or
- Beginning to wind the company up in accordance with the Corporations Act
If the DPN relates to:
- An unpaid amount of PAYG withholding or GST that is reported more than three months after the due date; or
- An unpaid SGC that is reported after the due date,
then, the only way to remit the penalty is to pay the debt.
What are the defences?
There are several statutory defences available to directors. Directors will not be liable for director penalties if they can prove that:
- As a result of an illness or another acceptable reason, the director did not take part in the management of the company (and it would have been unreasonable) for the period to which the penalty relates;
- The director took all reasonable steps (unless there were no reasonable steps for the director to take) to ensure that either:
- The debt was paid in full;
- An administrator was appointed to the company;
- A small business restructuring practitioner was appointed to the company; or
- The director(s) began to wind up the company in accordance with the Corporations Act
- Should a director penalty be incurred in connection to SGC liability, the director will have a defence if the company can reasonable argue that it took reasonable care in applying Superannuation Guarantee (Administration) Act.
Any defences to a DPN must be submitted to the Commissioner of Taxation in writing, and it should provide all the necessary information and supporting documentation to substantiate the defence.
The final word about director penalty notices
If you’re concerned about your company’s financial situation, your exposure as a director, or the risk of receiving a DPN, it’s critical to seek legal advice as soon as possible.
This article was written by Rodrigo Haddad
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can receive from marshalls+dent+wilmoth and other relevant experts.