Director penalty regime

Did you know that the Australian Taxation Office (ATO) can force company directors to personally pay a company’s PAYG and SGC obligations if the company fails to do so by the due date?

The only action the ATO needs to take to recover this debt from a director is to issue a Director Penalty Notice (DPN) under Schedule 1 of the Taxation Administration Act 1953 (TAA) for the debt, stating that the director will be personally liable for the debt at the expiry of 21 days’ notice from the date of the DPN unless the debt is fully paid, or arrangements to pay are put in place, or the company is placed into liquidation or administration.  After that 21 days, the ATO can commence recovery proceedings against the director.

The ATO can also issue a garnishee notice under Schedule 1 of the TAA to a third party, for example the director’s bank, requiring that the third party pay money it holds on behalf of the director directly to the ATO.

Schedule 1 of the TAA provides only two defences for directors and these are hard to establish. The first is that it was unreasonable to expect the director to ensure the Company paid its tax debts on time due to illness or some other good reason. The second is that the director took all reasonable steps to cause the Company to comply with its tax obligations.

Schedule 1 of the TAA provides that where one director receives a DPN for the company’s tax debts, that director can seek contribution towards the payment of the debt from all other liable directors.

If you are a director of a company, you must ensure you are aware of the financial health of the company, or you could be held liable for its tax debt.  Resigning as a director is not enough to exclude you from liability for tax debts incurred prior to the date of resignation.

If you have any queries, call us on 9422 8111 for an appointment to discuss further.