ATO Director Penalties: What Company Directors Need to do to Avoid Personal Liability

Under the ATO’s Director Penalty regime company Directors can be personally liable for company obligations.

The Director Penalty regime applies to unpaid “PAYG” withholding amounts, Superannuation Guarantee Charge “SGC” obligations and, from 1 April 2020, GST liabilities

The effect of the Director Penalty regime is that if a company of which a person is a Director fails to ensure that the company pays its PAYG withholding, SGC and/or GST liability obligations by the due dates, the Director becomes personally liable for a penalty equal to the unpaid PAYG withholding, GST or SGC amounts. These penalties are known as “Director Penalties”.

Director Penalty Notices

The Commissioner of Taxation may not, however, commence any proceedings against a Director to recover a Director Penalty until the expiration of 21 days after the Commissioner has given a Director Penalty Notice under Section 269-25(1) of Schedule 1 of the Taxation Administration Act 1953.

Remitting a Director Penalty

Except in the circumstances where the company has failed to report a relevant amount of PAYG withholding or a GST liability within three (3) months of the due date, or a SGC liability amount by the due date, a Director Penalty for failure to pay PAYG withholding, GST liability or SGC liability will be remitted and personal liability avoided where, within 21 days of the Director receiving the Director Penalty Notice, the company:

1. pays the relevant debt,
2. appoints an Administrator under Sections 436A, 436B or 436C of the Corporations Act, or
3. appoints a Liquidator to wind up the company.

Lock Down Director Penalty Notices

Where the company has not reported PAYG withholding or a GST liability within three (3) months of the due date, or a SGC liability amount by the due date, a Director Penalty will only be remitted if the company pays the debt. That is, the appointment of an Administrator or a Liquidator following receipt of a Director Penalty Notice in these circumstances will not absolve the Director from personal liability for the Lock Down Director Penalty amount.

Payment Arrangements

Where a company applies for a payment arrangement to pay the relevant debt, the Commissioner of Taxation is prevented from taking any steps to recover a Director Penalty so long as the arrangement is being performed. However, the making of the payment arrangement either before or following the issue of a Director Penalty Notice will not cause the Director Penalty to be remitted unless the payment arrangement results in payment of the debt in full.

Defences

In some circumstances a Defence is available under Section 269-35 of the Taxation Administration Act to actions brought for recovery of Director Penalties.  In summary, a Director will not be liable for a Director Penalty if:

• because of illness or for some other good reason, the Director did not take part (and it would have been unreasonable to expect the Director to take part) in the management of the company, or
• the Director took all reasonable steps to ensure that one (1) of the following four (4) things occurred:

1. the company paid the amount payable,
2. an Administrator was appointed to the company,
3. a Liquidator was appointed to wind up the company, or
4. there were no reasonable steps the Director could have taken to ensure that any of the above three (3) things occurred.

GST Estimate

From 1 April 2020, new legislation allows the Commissioner of Taxation to estimate GST liabilities and issue Director Penalty Notices based on those estimates. These types of Director Penalty Notices will most likely be Lock Down, as the GST will not have been reported within three (3) months.

Safe Harbour

Whilst recent amendments to the Corporations Act 2001 can Safe Harbour Directors from personal liability for insolvent trading if, among other things, the Director is taking steps to develop a course of action that is reasonably likely to lead to a better outcome for the company, the Safe Harbour provisions do not extend protection for Director Penalties.

How We Help

If you are concerned about Lock-Down Director Penalties or have received a Penalty Notice we suggest you urgently contact us for advice and assistance.