We have previously written about the dangers of director penalty notices and what can happen if you get one. This is an example of what can happen and what our client should have done to avoid the risk.
We were referred a client who was a director of a company which operated a number of hairdressing stores. She owned half the shares in the company and her business partner who was also a director owned the other half. Our client had not been involved in the financial management of the business. Rather, she was involved with the businesses’ operations.
The hairdressing stores had a number of staff, sometimes upwards of 30. Little did our client know, these staff weren’t getting paid any superannuation and the company was not lodging SGC Statements to report unpaid super to the ATO. This had occurred over a period of more than five years.
Unfortunately for our client, if a company does not pay superannuation and it also fails to lodge SGC Statements within one month of superannuation being due for payment, the directors are automatically liable for the unpaid superannuation. The ATO can then collect this debt by issuing the directors with director penalty notices. That is what happened to our client. The ATO issued our client with director penalty notices claiming more than $300,000 in unpaid super. Both our client and the other director were liable for this debt.
Were any defences available?
There is a defence to a director penalty notice claim that “you did not take part (and it would have been unreasonable to expect you to take part) in the management of the company during the relevant period because of illness or other acceptable reason”. However, this defence would not have applied because there was no acceptable reason for our client to not take part in the management of the company.
She was therefore liable for the debt.
What was the outcome?
The only option for our client was to file for bankruptcy, as she could not pay the director penalty debt and the other director had no ability to pay anything. And this is what our client intends to do.
What should our client have done?
Our client should have been properly involved in the management of the company. If you are a director of a company you have a responsibility to ensure superannuation is paid. Our client made the mistake of trusting her co-director and not checking that super and other debts were paid.
Our client could also have avoided lockdown automatic liability if she had caused SGC Statements to be lodged within one month of superannuation being due for payment. Superannuation is generally due 28 days after the end of a Quarter and therefore to avoid lockdown automatic liability SGC Statements must be lodged one month after that. If you lodge SGC Statements within that time, you can still get a 21-Day director penalty notice but you can avoid liability by appointing a Liquidator or an Administrator to a company or by using Small Business Restructuring.
Contact us for assistance
If you have a tax debt you should get advice about how to deal with it and the risks involved. We are happy to talk to you for no upfront cost and advise the options available.