The ATO can issue a company director with a Director Penalty Notice to recover the company’s unpaid PAYG Tax or superannuation from the director personally.
What does this actually mean? What could happen? And what should you do if you receive one of these notices?
Director Penalty Notice: Liability
You are personally liable for the amount claimed in a Director Penalty Notice unless the debt is paid or, in some cases, the company is placed in liquidation or voluntary administration within 21 days of the date of the notice.
However, liquidation or voluntary administration cannot be used to avoid personal liability for debts relating to BAS or Superannuation Guarantee Charge (SGC) Statements (required if superannuation is not paid on time) which have not been lodged by required times. For BAS this is three months from the due date for lodgement of the BAS. For SGC Statements this is by the following due dates:
|Quarter||Period||Super Due for Payment||SGC Statement Due Date|
|1||1 July – 30 September||28-Oct||28-Nov|
|2||1 October – 31 December||28-Feb||28-Feb|
|3||1 January – 31 March||28-April||28-May|
|4||1 April – 30 June||28-Jul||28-Aug|
A Director Penalty Notice is sent to a director’s personal address rather than to the company. Often, company directors are not aware that they have received a Director Penalty Notice, or what the effect of a notice is, until the ATO takes some form of recovery action.
In other cases, directors don’t know what a Director Penalty Notice is and therefore don’t take any sort of action when they receive one.
Neither of these options is advisable.
What happens if you are liable for a Director Penalty Notice?
If you become personally liable for the amount claimed in a Director Penalty Notice, this debt is just like an ordinary personal tax debt owed to the ATO.
If unpaid, the ATO can, and probably will, use this debt, to:
- Issue a Garnishee Notice to your bank, which will require the bank to pay a percentage of credit funds held in your bank accounts to the ATO;
- Issue a Garnishee Notice to your employer to have amounts deducted from your wages and paid to the ATO each pay cycle;
- Commence legal action against you, which will likely result in the ATO obtaining a Judgment;
- Issue a Bankruptcy Notice and then commence legal action to bankrupt you.
The effect of Director Penalty Notices: Real-world examples
Following are a few examples we have come accross of the type of recovery action that the ATO can take under a Director Penalty Notice – and the effects of that action:
- Shortly after we were appointed Liquidators of a company that traded a small restaurant, one of the director’s bank accounts suddenly became $60,000 lighter. The director initially did not know who had taken these funds. After some enquiries, we found that the ATO had issued a Garnishee Notice based on an amount claimed in a Director Penalty Notice, which the company’s director did not even know he had received. This obviously came as a huge shock to the director as he had “lost” $60,000 and there was nothing he could do about it.
- We were assisting a director of various civil construction companies negotiate a payment arrangement with the ATO for a director penalty debt which was thought to be just under $300,000. The ATO had obtained a Judgment against the director for this amount and had commenced legal action to bankrupt him. We had an in principle agreement with the ATO for a payment arrangement over two years. However, before it was signed off, the ATO’s solicitor informed us that the director had received another five Director Penalty Notices (over three years ago) and the total amount the ATO was claiming was now over $1.2 million. The director had no prospect of paying all of this debt and was left with no choice but to go bankrupt.
- We have assisted directors of several failed companies who have received Director Penalty Notices, as a result of which the ATO started garnisheeing wages from amounts payable by their new employers. The ATO can claim significant amounts from wages, having a large impact on the ability to even meet general living expenses. The only real option for people who get a Garnishee Notice (for any type of tax debt) is to ask the ATO to reduce the amount being garnisheed, as even filing for bankruptcy does not make the notice unenforceable.
What can you do if your company has unpaid tax debts?
If you are a director of a company with a PAYG Tax or SGC debt, you need to be proactive. If you don’t act quickly, the ATO may begin taking recovery action, which may include issuing a Director Penalty Notice.
Firstly, read our article on how to avoid liability under a Director Penalty Notice.
Then, if you require professional help with dealing with the ATO or in implementing appropriate strategies to mitigate tax problems, don’t hesitate to get in touch with us.