In brief - Directors can be held liable for late unpaid or unreported company liabilities
While the Director Penalty Notice (DPN) regime tightens the noose around directors of companies that are late in paying tax, lodging returns or paying superannuation guarantee charges (SGC), there are steps that directors can take to avoid becoming liable under the regime.
ATO must issue a director penalty notice prior to commencing recovery
The Australian Taxation Office (ATO) has the power to commence recovery against directors under the DPN regime for unpaid company liabilities that remain unpaid or unreported after three months of becoming due. Before commencing proceedings against directors for unpaid company liabilities, the ATO must issue a DPN.
When the ATO issues a DPN, a director has the following options to respond to the DPN within the 21-day period (which runs from the date of the notice, not from receipt):
- pay the debt the subject of the DPN - if the debt is paid by one director of a company, the Taxation Administration Act 1953 (TAA) provides a right of indemnity and contribution to allow directors to recover amounts that they have paid on behalf of the company against the company or its other directors ( section 269-45, Section 1 of the TAA),
- enter into personal insolvency, or
- enter into an agreement under section 222ALA of the Income Tax Assessment Act 1936 to pay the liability. The ATO cannot commence proceedings in respect of the DPN while such an arrangement is in place.
Does placing the company into administration or liquidation avoid personal liability under a DPN?
Changes implemented to the DPN regime in June 2012 mean that directors can no longer avoid personal liability by putting the company into administration or liquidation if the amount owing by the company remains unpaid and unreported to the ATO at the end of the three-month reporting period for PAYG withholding and SGC obligations. It is important to note that the three-month period may have lapsed before the issuance of the DPN.
In order to preserve the right of complying with a DPN by putting the company into administration or liquidation, the company should ensure that it reports any unpaid amounts to the ATO within the requisite three-month reporting period for PAYG withholding and SGC obligations (in accordance with the reporting requirements under the TAA). The DPN regime imposes a lockdown on directors for liabilities that are unpaid and unreported three months after the due date.
Consequences of non-compliance with a DPN
If the DPN remains outstanding after its expiration, the director is held personally liable and the ATO may commence proceedings to recover the outstanding tax debt or SGC from the directors of the company. The ATO cannot commence proceedings unless a DPN has been issued. The ATO may also take other action, such as the issuance of garnishee notices, however, the ATO can do this regardless of whether a DPN has been issued.
In certain circumstances, directors and associates of directors will also be prevented from obtaining credits for withheld amounts in their individual tax returns where the company itself has failed to pay withheld amounts to the ATO. Directors and associates of directors can also be liable for PAYG withholding non-compliance tax.
Directors' defences may include illness
If a director does not comply with the DPN and the ATO commences proceedings, the director will not be liable for the DPN where he or she can establish that because of illness or for some other good reason, the director was not involved in the management of the company and it was reasonable for the director not to be involved. The provisions state that the defence will be available if it is "unreasonable to expect (the director) to take part due to illness (theirs or someone else's) or some other good reason." The Commissioner may also excuse a director in circumstances where an ill spouse or child may need to be cared for.
Reasonable steps defence is another possibility
Another defence option is to show that the director took all reasonable steps to ensure that (or no such steps were available):
- the company complied with its obligations to pay
- an administrator of the company was appointed, or
- the company would begin to be wound up.
It is not sufficient for a director to state that no reasonable steps were available to cause one of the above three things to happen. The defence only succeeds if there were no reasonable steps available.
Reasonable care defence for superannuation guarantee charge DPNs
Where the DPN relates to a SGC, there is an additional defence available where a director can establish that the company took reasonable care as to non-application of the Superannuation Guarantee (Administration) Act 1992 (SGA Act). The SGA Act allows for a 60-day period to raise a defence against the recovery of all director penalties by methods other than court proceedings (such as collecting amounts from third parties), regardless of the character of the underlying liability (i.e. PAYG withholding or superannuation guarantee charge).
While the defences above can only be raised if the ATO commences proceedings to recover the debt, it may be prudent to raise those defences prior to the expiration of the DPN to avoid the ATO commencing proceedings to recover the debt which is the subject of the DPN.
What can directors do to avoid becoming liable under the DPN regime?
While the DPN regime can have severe consequences for directors, there are steps that you can take to ensure that you do not become liable under the DPN regime. These include the following:
- Ensure that your company's records with ASIC are properly maintained and kept up to date. A director will still be liable for the DPN even if it is posted to an address where you no longer reside. Also, under the changes, the ATO may serve a DPN upon a director at your tax agent's address.
- Ensure that you are kept abreast of the company's financial position, including ensuring that the company is complying with its PAYG and superannuation obligations. Ignorance of a tax liability is no defence.
- If you as a director suspect that the company is not going to be able to lodge its PAYG or remit its superannuation payments within the requisite period, you should contact your accountant or your lawyer to get appropriate advice as to how to avoid triggering the DPN regime.
Seek legal advice immediately if you receive a DPN
While the issuance of a DPN can have dire financial consequences for a director of a company, it is not all bad news, as there are defences that can be raised and steps that you can take to ensure that you do not become liable under the DPN regime.
If you receive a DPN, you should contact your lawyer immediately and certainly before the expiration of the 21 days from the date of the DPN, so that you can get appropriate advice and work out a strategy to avoid becoming personally liable for the company's tax liabilities.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.