With the Commonwealth Government deficit at its highest level since World War II and as the COVID-19 pandemic continues to cripple the Australian economy and stifle federal tax collections, we will inevitably see a significant increase in revenue collecting activity undertaken by the Australian Taxation Office (ATO).

One way it is doing this is by using the Director Penalty Regime (DPR) and since incorporating Goods and Services Tax (GST) in the DPR since 1 April 2020, it is easier for the Commissioner of Taxation to collect additional revenue from directors who fail to cause their companies to meet their tax obligations.

But when can directors be held liable for company tax liabilities and what is the process that is followed? This post looks at these questions in more detail.

When Is A Director Liable?

Under Division 269 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (the TAA), a director of a company must ensure that the company complies with its obligations regarding Pay as You Go (PAYG) tax, the Superannuation Guarantee Charge (SGC), and GST. If the company fails to do so, every director of the company becomes personally liable to pay a penalty equal to the company’s unpaid tax liability.

When a person becomes a director of a company after the due date for the payment of liability that person will only become liable if the company has not:

  • complied with its obligations
  • appointed a small business restructuring practitioner
  • had an administrator appointed to it; or
  • begun to be wound up, 30 days after their appointment

Director Penalty Notices

Under the DPR, the ATO can impose a personal penalty on directors who fail to ensure that the company complies with its PAYG, SGC, or GST obligations. This means that if a company has outstanding tax obligations, the ATO can send a Director Penalty Notice (DPN) to a director giving them 21 days to:

  • Cause the company to pay the debt, or
  • put the company into liquidation, or
  • put the company into voluntary administration, or
  • make a payment arrangement with the ATO.

For a DPN to be valid, Division 269-25 of the TAA requires certain requirements to be met. These are:

  • The DPN must set out what the ATO thinks the unpaid amount of the company’s tax obligations are.
  • The DPN must state that the director is liable to pay to the ATO an amount equal to that unpaid amount because of an obligation the director has or had under Division 269 of Schedule 1 of the TAA, and
  • Explain the circumstances under which the penalty will be remitted.

An important thing to remember is that the DPN does not have to be physically received by the director in question for it to be valid as long as there has been effective delivery as defined in the TAA. This means that a DPN is deemed to have been given at the time when the ATO leaves or posts it.

When a valid DPN was delivered and no action has been taken by either the director or the company, the ATO has the right to recover a penalty through:

  • garnishee notices,
  • offsetting the directors’ tax credit against the penalty, or
  • initiating legal recovery proceedings against the director to recover the penalty.

Avoiding Payment After A Director Penalty Notice

The opportunities for avoiding payment after a DPN has been issued are limited. In terms of the TAA, payment of the personal penalty can be remitted if the company pays the outstanding debts, an administrator is appointed, or the company has commenced being wound up.

Likewise, the defences to a liability under a DPN are relatively limited. Here, Division 269-35 of Schedule 1 of the TAA provides that a director may avoid personal liability if the director can show that:

  • because of illness or some other good reason, the director did not take part in the management of the company at the time when the obligation commenced, or
  • the director took all reasonable steps to ensure that the company complied with its tax obligations, specifically by ensuring that:
    • the company paid the amount outstanding,
    • an administrator was appointed to the company,
    • the directors began winding up the company, or
    • in the case of an unpaid SGC liability, the company treated the SGAA is applying in a way that could be argued was in accordance with the law and took reasonable steps to apply the Act.

It is important to remember that, for any of these defences, the TAA requires that they be raised within 60 days from the date when the DPN is issued. This means that, if the defences are raised later than 60 days, the director will incur personal liability.

Final Thoughts

From the above, it is clear that it is vital for the company to comply with its PAYG, SGC, and GST obligations so the direct can avoid personal liability.

If the company doesn’t comply and a DPN has been issued, directors don’t have a lot of options for avoiding personal liability.

Blaine Hattie is a commercial lawyer that regularly negotiates with the ATO on behalf of his clients.

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