Historically, the Australian Taxation Office (“ATO”) has been able to recover a company’s unpaid PAYG Withholding Tax (“PAYG Tax”) debts from the company’s director, or directors, in the event that the ATO issued a director with a Director Penalty Notice. A director who received a Director Penalty Notice was only able to avoid personal liability if one of the following steps were taken within 21 days of the date of the notice:-
- The PAYG Tax was paid; or
- A Liquidator was appointed to the company; or
- An Administrator was appointed to the company.
On 1 July 2012, legislation commenced which added to the circumstances where a company’s director(s) could become liable for debts which the company owes to the ATO. A summary of some of the effects of this legislation is as follows:-
- The ATO is still able to issue Director Penalty Notices to a company’s director(s) in respect of the company’s quantified and unpaid PAYG Tax, with the effect of the Notice being as set out above.
- The ATO is now able to issue Director Penalty Notices to a company’s director(s) in respect of unpaid compulsory superannuation contributions, which are payable to the ATO as Superannuation Guarantee Charge (“SGC”).
- The ATO has been given greater powers to conduct default assessments of a company’s PAYG Tax liability and SGC liability in circumstances where a company fails to lodge Business Activity Statements (“BAS”) or SGC Statements by due dates.
- Where a PAYG Tax or SGC debt remains unreported for more than three (3) months after the due date for lodgment of required BAS or SGC Statements then the company’s director(s), may become personally liable for the company’s unreported PAYG Tax and/or SGC debt(s) and the director(s) will not be able to avoid personal liability by arranging for a Liquidator or Administrator to be appointed to the company.
- Where a company is placed in liquidation or voluntary administration, the company’s director(s) and their associates (such as a director’s wife and children) may become personally liable to pay PAYG Tax which has been withheld from wages paid to them by the company, but which has not been remitted to the ATO.
Amendments to Director’s Personal Liability for Unreported PAYG Tax and SGC
A company’s director(s) may now be personally liable for a company’s unpaid PAYG Tax and/or SGC debt(s) if the company fails to lodge required BAS or SGC Statements within three (3) months after the due date(s) for lodgment. The directors’ liability arises upon the ATO issuing the director(s) with Notices setting out the ATO’s default assessment of the company’s liabilities and informing the director(s) that they will be personally liable for the debts if not paid by the company within 21 days. In these circumstances a company’s director(s) will not be able to avoid personal liability for the company’s PAYG Tax and SGC debts by arranging for a Liquidator or Administrator to be appointed to the company.
The amended provisions relating to unreported SGC only apply to ATO lodgments for periods after 1 July 2012. However, the amended provisions relating to a director’s personal liability for unreported PAYG Tax appear to apply to all outstanding BAS lodgment requirements including BAS due to be lodged prior to 1 July 2012.
What Should Company Directors Do to Avoid Personal Liability after a Director Penalty Notice
Company directors should consider the following matters in order to avoid potential personal liability for their company’s debts:-
- Directors should ensure that a company’s lodgments are made on time and that any outstanding lodgment obligations are urgently brought up to date.
- Where a company is unable to pay its outstanding quantified or unquantified PAYG Tax or SGC liability, directors should consider appointing a Liquidator or an Administrator to a company in order to avoid possible personal liability for these debts.
- Directors should ensure that their residential address is correctly recorded with the Australian Securities and Investments Commission, as notices of personal liability will be issued to a director’s residential address.
- Directors should ensure that a company’s employees and subcontractors are appropriately classified, such that required amounts of PAYG Tax or superannuation are withheld or paid in respect of payments to relevant parties.
Given the serious effects that the amendments to the Director Penalty Notice regime may have on company directors’ personal financial positions, directors and their advisors may wish to obtain appropriate advice and assistance when faced with the circumstances set out in this article.