Company directors who fail to comply with obligations to pay tax to the ATO or to pay superannuation for their employees face a penalty regime under the tax law. The penalty regime is known as the director penalty regime.
The director penalty regime ensures that a company either meets its obligations or goes promptly into voluntary administration or liquidation. The penalty regime aims for compliance by making the directors of the company personally liable for the company's payment obligations.
The director's obligations are enforceable by penalties equal to the unpaid amount of the company's liability. A penalty is automatically imposed (and is due and payable) at the end of the due day if the company is still under its payment obligation (or has not been placed into liquidation or voluntary administration). Note that, for these purposes, the superannuation guarantee for a quarter is treated as being payable on the day by which the superannuation guarantee statement for that quarter must be lodged even if, on that day, the charge has not been assessed.
Directors have three options to avoid personal liability. They must take steps to ensure that the company, on or before the due date of payment:
- complies with its obligation (eg pays the unremitted PAYG withholding amount or unpaid superannuation guarantee) to the Tax Commissioner;
- has an administrator appointed; or
- goes into liquidation.
Note that a deregistered company's registration may be reinstated so that the company can be put into liquidation (for example, by the directors or the ATO).
A newly appointed director can also be penalised if none of the options listed above is taken within 30 days of their appointment. Even if a newly appointed director resigns within the 30-day period, they can still be liable for the unpaid PAYG withholding and SG liabilities of the company that were due before their appointment. A director in this position should contact us for advice.
Former directors can also be liable. Directors remain liable under the director penalty regime for penalties equal to the unpaid PAYG withholding and SG liabilities of the company which were due up to the date of their resignation, and also for liabilities which became due after the director's resignation – but where the first withholding event in the reporting period occurred prior to the director's resignation.
A director penalty is remitted if, before receiving a director penalty notice, or within 21 days of receiving a director penalty notice, any of the following things happen:
- the company complies with its obligation;
- an administrator of the company is appointed; or
- the company begins to be wound up.
However, if three months have lapsed after the due day and the underlying liability remains unpaid and unreported, the director penalty is not remitted as a result of placing the company into administration or beginning to wind it up. In the case of new directors, the three-month period starts to run from the day they become a director. This rule only applies if the director of the relevant company stops being under the relevant obligation on or after 30 June 2012.
Some key points to note about director penalty notices:
- A penalty is not payable by a director unless the Commissioner serves a director penalty notice (DPN).
- The Commissioner cannot commence proceedings to recover a penalty until the end of 21 days after the written notice is given to the director.
- A DPN must set out what the Commissioner thinks is the unpaid amount of the company's liability and state that the director is liable to pay, by way of penalty, an amount equal to the unpaid amount because of an obligation under Div 269 of the Taxation Administration Act 1953 (the TAA).
- The notice must explain the main circumstances in which the penalty will be remitted.
- An error in a DPN may not invalidate the notice, if it is not misleading.
- A notice is taken to be given to a director when it is left at, or posted to, the director's address for service. An online search of ASIC documents to obtain the director's address is seemingly acceptable. So it's important to ensure that contact details are kept up-to-date.
- There are specific defences available under the regime (s 269-35 of the TAA). These include defences relating to illness, taking all reasonable steps, and having a reasonably arguable position (if the DPN relates to the superannuation guarantee payment). Note there are strict requirements in order for the defences to apply.
- The ATO has previously advised that it is likely to issue a director penalty notice where the company has not engaged with it to resolve outstanding debts.
DPNs need only to call director's attention to Div 269
It is difficult to argue that a DPN is not valid, especially if the notice complies with the requirements of the law and is correctly served by the Tax Commissioner.
In one case before the New South Wales Court of Appeal, a director of a company was unsuccessful in arguing that DPNs issued to him for some $1 million (including interest) were invalid.
The Court of Appeal heard that the company had failed to pay withheld tax amounts to the Commissioner. The Commissioner issued notices, which sought to recover penalties allegedly owed by the director in respect of the company's failure to pay the withheld tax amounts to the Commissioner.
The director essentially argued that the notices were invalid as they did not state expressly that his liability arose because of an obligation that he has or had under the provision in the TAA that deals with directors' obligations, and that the Commissioner was therefore not entitled to prosecute the proceedings against him. It was argued that because the notice did not make that specific reference, it did not meet all the requirements to be a valid notice under the law. The notices only referred to a specific legislative section concerning director penalty notices.
The Court found that while the notices failed to refer expressly to the fact that the obligation arose under the relevant provision, as contended by the director, the notices clearly informed him that he was liable because of statutory provisions associated with the section concerning director penalty notices. That is, the notice needed only to call the director's attention to the provision in the TAA dealing with directors' obligations.
Want to find out more?
Company directors have a legal responsibility to ensure that their company meets its pay-as-you-go (PAYG) withholding and superannuation guarantee (SG) obligations. A company director who fails to meet a PAYG withholding or SG liability in full by the due date automatically becomes personally liable for a penalty equal to the unpaid amount. It is particularly important to periodically review your circumstances to help alleviate potential issues before they occur. Please contact us if you would like more information. Call us at Robert Goodman Accountants on 07 3289 1700 or email us at reception@rgoodman.com.au .
© Copyright 2017. All rights reserved. Source: Thomson Reuters. Brought to you by Robert Goodman Accountants.
