As a director, the main way to become personally liable for company tax debts is as a result of the Director Penalty Notice laws. The laws were significantly strengthened in June 2012 and the new laws were designed to, and should, change the way directors view company tax debts. It is now much easier to become personally liable!
There are now two types of Director Penalty Notices. The first is the traditional Director Penalty Notice which gives a director 21 days to take certain actions which will result in the proposed “penalty” being remitted, which means cancelled. Secondly, under new laws if company tax returns are not lodged on time then a director is automatically personally liable for Pay As You Go (“PAYG“) and Superannuation Guarantee Charge (“SGC“) liabilities.
The new laws have greatly complicated an already difficult area of the law. So we recommend if you are a director and you are worried about personal liability under the Director Penalty Notice laws then you should call us immediately so we can give specific advice. But, we have two overriding pieces of advice for directors:
- Get your company tax returns up to date and lodge them – if the company can’t pay the debt due under a BAS lodge your return anyway; and
- If your company has existing PAYG liabilities that are already unpaid and unreported for three months after the due date you should call us immediately to establish whether you are already personally liable.
The 21 Day Director Penalty Notice
Director Penalty Notice laws have been around for many years and the most common Notice gives directors 21 days to act. In brief, if a company has outstanding Pay As You Go or Superannuation Guarantee Charge debts then the Australian Tax Office (“ATO“) can send a Director Penalty Notice to a director giving that director 21 days to:
- cause the company to pay the debt; or
- put the company into Liquidation; or
- put the company into Voluntary Administration; or
- Come to a payment arrangement with the ATO.
“Lockdown“ Director Penalty Notices – the new DPN laws
New legislation was passed in June 2012 that dramatically increases the scope of the DPN laws and director personal liability. In brief, the new laws:
- Expand the DPN regime to include SGC;
- Make directors automatically personally liable if PAYG or SGC amounts remain unpaid and unreported three months after the due date for lodging a return and a director cannot cause their director penalties to be remitted (i.e. cancelled) by placing their company into voluntary administration or liquidation;
- Restrict access to PAYG withholding credits for company directors and their associates where the company has failed to pay withheld amounts to the Commissioner of Taxation – this change applies to amounts withheld during the 2011-2012 and later income years;
- Have effectively backdated the director personal liability for existing PAYG liabilities if the amounts are already unpaid and unreported three months after their due date.
Very soon after the Lockdown DPN Laws were introduced, we saw the ATO use its new powers to pursue directors for company PAYG liabilities that had accrued in 2009, 2010 and 2011. Yes, that is retrospective personal liability and it is being enforced.
Note that the old DPN laws still apply so you may get a DPN that gives no opportunity to have the penalty remitted, being a Lockdown DPN, or one that gives 21 days in which to act and avoid personal liability.
Advice for all directors regarding tax debts
The new DPN laws are designed to change the behaviour of directors. In the past, directors tended to leave tax debts at the bottom of the payments pile. That was often achieved by directors simply not complying with tax lodgement and payment requirements – BAS’s were not lodged on time and tax debts were often the last to be paid. That is now a very bad approach!
Advice for all directors regarding Superannuation Guarantee
Under Superannuation Guarantee law if an employer is not able to meet their superannuation obligations by the due date for payment they are required to lodge a “Superannuation guarantee charge statement – quarterly (NAT9599)“ with the ATO. With this new legislation it is now imperative that a company lodge a NAT9599 with the ATO within 3 months of the due payment date or its’ directors will be automatically personally liable for the company’s Superannuation Guarantee Charge (SGC) liability. It should be noted that SGC is made up of the shortfall in Super payments plus interest (10% pa) and a processing fee (currently $20 per employee, per period). So unlike PAYG where a director is made liable for the shortfall only, for Super the director is liable for the shortfall plus interest and fees!
OUR ADVICE TO ALL COMPANY DIRECTORS
|General approach to BAS Returns and Super debts||Get your company tax returns up to date and lodge them.||In the past, directors tended to just not lodge Returns and they only risked personal liability if the ATO sent a Director Penalty Notice.|
|If the company can’t pay the debt due under a BAS for PAYG or a Super debt, lodge the return anyway, otherwise you will be personally liable for the debt.||It was hard for the ATO to pursue a debt they didn’t know about.|
Advice for directors regarding past PAYG tax debts
The sting-in-tail of the new laws is that they effectively backdated the director personal liability for existing PAYG liabilities if the amounts are already unpaid and unreported three months after their due date. So what should a director do if their company has a past due PAYG debt or is in financial difficulty? Each situation will be different and advice is complicated by the fact that the old and new laws both apply. So we recommend that you gather the details, as best you can, on what returns have been lodged and when they were lodged and then call us so we can provide you with specific advice.
Other things you should know about Director Penalty Notices
We mentioned that the laws were complicated. Well here are a few more things to know about the Director Penalty Notice regime:
- a new director of the company is liable for PAYG and SGC debts but not until 30 days after they become a director;
- if the ATO does not know how much a company owes for PAYG or SGC liabilities, then the ATO can estimate those amounts;
- a director has a defence in relation to a Director Penalty Notice if the director had an illness that prevented him or her participating in the management of the company, or if the director took all reasonable steps to ensure compliance;
- in addition to the above defence, a director who becomes liable to a director penalty for not causing each company to comply with its superannuation obligations is not liable if the company treated the Superannuation Guarantee Act as applying to a matter in a way that was a reasonably arguable and the company took reasonable care in applying the Act (this probably refers to confusion over the treatment of employees as contracts rather than employees); and
- in addition to the requirement that the ATO can serve a Notice on a director, the ATO may also serve a copy of the Director Penalty Notice on the director at his or her tax agents address.
If the above advice has not answered your questions you might want to review the following pages and downloadable Information Sheets:
- Director Personal Liability
- Director Liability for Company Tax Debts
- ATO Garnishee Order
- ATO Departure Prohibition Order