There were major changes to director penalty notices in 2012 – limiting somewhat the ability of directors to escape personal liability for corporate tax debts. As readers are likely well aware, company directors are legally responsible to ensure payment of a company’s Pay-As-You-Go withholding (PAYGW) and superannuation guarantee charges (SGC), If they fail to meet those obligations, they may become personally liable to pay such amounts. It is thus vital that all directors understand their legal obligations in this respect.
What is a Director Penalty Notice?
Under Australian Tax Law, a company director must ensure that their company report and pays PAYGW and SGC on time. Should the company fail to do so, the directors may then be subject to a director penalty where they may be made personally liable for the unpaid PAYGW and SGC. This penalty is to be equivalent to the unpaid amount of PAYGW or SGC.
When do I receive a Director Penalty Notice?
You should note that directors are liable to the unpaid amounts when the payments are due. The directors are automatically liable. However the ATO must not commence proceedings against the directors until 21 days after they are given a director penalty notice. At the end of the 21 days, the ATO may commence an action to recover the outstanding tax against the director.
What types of Director Penalty Notice are there?
Broadly speaking, there are two types of notices: often referred to as a ‘lockdown’, and a ‘non-lockdown’ penalty notice.
A ‘lockdown’ director penalty notice is where a company has failed to lodge its business activity statement (BAS) or instalment activity statements within 3 months of their due dates. It is a ‘lockdown’ notice because the company must pay the unpaid PAYGW or SGC to relieve the directors from their personal liability. There is no other recourse to respond to the penalty.
A ‘non-lockdown’ director penalty notice is where the company directors have lodged its BAS or instalment activity statements, but the PAYG and SGC remain unpaid. There are certain actions that the directors can take within 21 days to cancel the penalty notices issued. This includes going into voluntary administration or liquidation.
Is there a defence available for directors?
There are certain circumstances where the director may not be personally liable for the director penalty notices:
- If the director was not managing the company at the time due to illness or another acceptable reason; or
- If the director took all reasonable steps to make the company meet the PAYG and SGC obligations, appoint an administrator or wind up the company.
There may be other defences available to you depending on your circumstances. It is important to seek legal advice as soon as you receive the penalty notice as you may have the recourse available to recover the penalty notice amount against the company or other company directors.
The defences are strictly limited in scope and it is an unacceptable defence to argue that the company did not have sufficient money to pay the PAYG and SGC, failed to agree on appointing an administrator, or that the penalty notice was sent to the old address.
Article by Stipe Vuleta & Steven Lee