Is it automatic?

A common question we are asked is whether a director is automatically personally liable for a company’s tax debts. It’s a little bit complicated but the answer is – no! However, it is possible to become personally liable for a company’s tax debts.

And beware, there is new legislation that became law in  June 2012 that significantly increased the potential personal liability of directors for company tax debts.

The starting position is that a company’s tax debts are just that – a debt of the company and not a debt of the director. The Tax Act states that a director is personally liable for PAYG deductions if those deductions are not paid to the ATO, but, that liability is only enforceable if the ATO sends a Director Penalty Notice (“DPN”) to a director. So in practice there is no automatic personal liability, but rather, a director will only be liable if he or she receives a  DPN.

Before the new legislation came into affect in June 2012, a DPN gave a director 21 days notice in which they could put their company in Liquidation or Voluntary Administration to avoid personal liability. The new legislation introduced a clause to say if the company has not paid or reported it’s PAYG liability within 3 months of the due date, the DPN cannot be remitted by winding the company up. They still have to send a DPN, but the only options to avoid enforcement of personal liability are to pay the debt in full, or come to a payment arrangement. They call these “Knockdown DPNs”

We have other pages that deal with Director Penalty Notices in more detail and you should read about the details there, but the general principle is that if you receive a Director Penalty Notice you should act immediately.