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What to do if you receive an ATO Director Penalty Notice

Company directors have a legal responsibility to ensure that their company meets its pay as you go (PAYG) withholding and superannuation guarantee charge (SGC) obligations and are personally liable for unremitted amounts.

The director of a company that fails to meet a PAYG withholding or SGC liability in full by the due date automatically becomes personally liable for a penalty equal to the unpaid amount.

The ATO holds a special suite of powers beyond the usual debt recovery strategies which sets them above the usual creditor and those powers have expanded in recent years.

Beyond a standard wind up action for companies and bankruptcy proceedings for individuals, the ATO’s powers extend to Director Penalty Notices, garnishee orders to third parties, estimates and default assessments.

This article focuses on arguably the most powerful – Director Penalty Notices (DPNs).

Why has the ATO got these powers?

These new laws, introduced about two years ago, were designed to reduce the amount of phoenix activities which occurred under the previous law where a director could avoid personal liability if, having been served with a DPN, he caused the company to be wound up. To achieve their objective, the ATO’s recovery options are now linked to the company’s reporting obligations.

When does a director’s liability become a personal liability?

The Commissioner of Taxations issues a ‘Director Penalty Notice’ to the directors and this creates a personal liability if no action is taken within 14 days of the date of the Commissioners letter.

Should you receive a ‘Director Penalty Notice’ suffice to say it must be acted on immediately.

Director’s Personal Liability Expanded by ATO

A company is now required to report its PAYG and Superannuation Guarantee Charge SGC liabilities periodically, with the period depending on the size of the company.

The changes allow the ATO to immediately commence legal proceedings against a director to recover outstanding PAYG withholding amounts or SGC, without the need to serve a DPN if the company has failed to pay and report those liabilities for more than three months after the date they fell due.

In such cases, a director cannot avoid personal liability for those amounts by placing the company into administration or liquidation within 21 days.

The only options available to a director where the ATO has commenced proceedings to recover a company’s debt that is unpaid and unreported after three months are to cause the company to pay its debts or to pay them personally.

Options available to avoid personal liability

The ‘Director Penalty Notice’ provides four options to avoid personal liability for the company’s unpaid PAYG Tax.

Remission of the penalty will occur if the director/s instigates one of these options which are detailed within the ‘Penalty Notice’ within 14 days. These four options are:

  • The company’s liability has been paid.
  • An agreement (under Section 222ALA of the ITAA) to pay the liability has been put in place.
  • The company is being wound up.
  • The company is under Administration (within the meaning of the Corporations Act, 2001).

Obviously any director in this situation should seek urgent advice on each available option to ensure that they avoid personal liability.

What are the Defences against director penalties?

A director is not liable for a director penalty if he can establish that one of the defences under the legislation is available to him.

A defence can be that due to illness or another acceptable reason, a director was not managing the company at the time the liability was incurred. This defence can be used if it is ‘unreasonable to expect (the director) to take part due to illness (theirs or someone else’s) or some other good reason’.

A director is also not liable for a director penalty if they can establish that they took all reasonable steps to:

  • make the company to meet its obligation to pay
  • appoint an administrator
  • wind the company up.

However, this defence is only acceptable if no reasonable steps were available.

Unacceptable defences would include:

  • the company had insufficient funds to pay the tax, or
  • a consensus to appoint an administrator could not be reached.

For the SGC liability, a director may not be responsible for a director penalty if they can establish that the company took reasonable care in trying to apply the SGA Act. This provision recognises that there can be some uncertainty about SGC liabilities, especially relating to employee entitlements. Note though that there is no corresponding defence for PAYG withholding obligations.

Also directors cannot use a defence that a DPN was sent to the wrong address. The ATO use the address listed on the public record of the company with ASIC. The ATO considers directors are responsible to keep this information current.

Summary

The laws governing the director penalty notice regime were strengthened significantly in June 2012. The net result is that it is now easier for directors to be held personally liable for debts due by their company to the ATO.

If you have any questions regarding Directors Penalty Notices or need help or advice please contact us on 08 9422 8111 or email buslaw@taitlegal.com.au.