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There are circumstances where a director is personally liable for its company’s debts. One example is where a director receives a director penalty notice from the Australian Tax Office (ATO). As a company director, you have a legal responsibility to ensure your company meets its corporate governance obligations. For example, companies must meet their Pay As You Go (PAYG) withholding and Superannuation Guarantee Charge (SGC) amounts. If the company fails to do so, a director becomes personally liable for the unpaid amount. This article will explain what you need to know about director penalty notices and steps to take if you are a director who receives one. 

While the ATO put most overdue tax collection on hold during the COVID-19 pandemic, it has recently recommenced collection activity, with rumours circulating that up to 50,000 Director Penalty Notices have recently been issued.  

What is a Director Penalty Notice?

A director penalty notice is a notice the ATO sends to a company director in one of several circumstances. For example, the notice can make the director personally liable for either the company’s pay as you go (PAYG) withholding requirements or superannuation guarantee charge (SGC) liabilities.

An Example

Jamie is the sole director of Fusion Pty Ltd (the Company). They are required to pay amounts withheld under the PAYG withholding provisions every quarter. For the first quarter of the current financial year, the Company withheld payments made to its employees. Likewise, Jamie failed to report or pay this to the ATO by the due date. 

The ATO estimated the unpaid amount of PAYG withholding for the first quarter and gave written notice of the estimate to the Company on 1 August 2021. From this date, Jamie will be personally liable for a director penalty amount equal to the unpaid amount of the estimate.

Note that Jamie did not report the unpaid amount within three months of the due date of the underlying liability. As such, the director penalty notice can only be remitted by the Company or Jamie paying the amount of the estimate. 

What Are the Requirements?

Among other liabilities, a company with employees has PAYG and superannuation guarantee obligations.

PAYG is the obligation an employer has to withhold amounts from payments made to employees. As an employer, you must keep some of the amount paid to your employee as tax. You have to withhold the amount from the payment to your employee and send that payment to the ATO.

Your company’s superannuation guarantee is the minimum amount of money that you must pay your employees for their retirement. If you fail to pay the superannuation guarantee on time, you may have to pay the SGC. The SGC consists of any shortfall of superannuation guarantee amounts in addition to interest and administration charges.

Additionally, where a company fails to meet their requirements, meaning the amounts remain unpaid, the ATO will seek to collect these amounts from the company. It may also serve the director with a penalty notice. The ATO must issue the director penalty notice before it can commence recovery of the unpaid liabilities.

Types of Notices

There are two types of director penalty notices. The first is a traditional notice where the director receives a warning. They then have 21 days to act to avoid liability. The second type of notice, a lockdown penalty notice, is an automatic personal liability notice. It is effective as soon as the ATO serves it on the director.

Traditional Notice

A director may receive a 21-day director penalty notice where the company has outstanding PAYG or SGC liabilities. As soon as the ATO sends the penalty notice, the director has 21 days to act to avoid personal liability. They can either:

  • pay the debt;
  • place the company into liquidation or voluntary administration; 
  • appoint a small business restructuring practitioner (available for companies with a total debt under $1 million); or
  • take steps to wind up the company.

At a practical level, a director may also take steps to agree on a payment plan for the company to pay its tax debts.  While coming to such an arrangement would not avoid personal liability for the debt, the ATO is unlikely to pursue an individual director for such debts if a payment plan is in place and being complied with. This is a recent change, as previously, directors could avoid personal liability by entering into a payment arrangement with the ATO.

The Federal Circuit and Family Court of Australia decision in Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5 found that entering into a payment arrangement does not cause a tax debt which is due and payable to cease to be due.

Further, the director may escape personal liability for the debt if the company appoints a liquidator or an administrator within 21 days. Alternatively, you might place your company into voluntary administration or liquidation. In that case, you can only avoid liability if the amounts were reported and lodged within three months of the due date. 

Lockdown Penalty Notice

A director may receive a lockdown penalty notice where PAYG or superannuation amounts are unpaid, and fails to lodge their company returns within three months. Where a director gets a lockdown penalty notice, they must pay the debt in full unless they have a valid defence. They cannot avoid liability by placing the company into voluntary administration or liquidation.

Who Can Be Issued With a Director Penalty Notice?

Any current director of the company may receive a director penalty notice. In addition, a director who has resigned may also receive a notice. The effect of this is that even if a director resigns, they may still be liable for any unpaid PAYG or SGC liabilities before their resignation. They may also be liable for amounts due after they resign if the withholding events resulting in the unpaid liabilities occurred during their time as director.

Even a newly-appointed director, provided they have been in office for more than 30 days, may receive a notice. Therefore, incoming directors should examine the company’s financial records to ensure they are not subject to a director penalty notice as a result of a liability incurred before their appointment.

Further, a de facto or shadow director may receive a director penalty notice.

Options for Directors

If a director is served with a director penalty notice, there are only limited options to discharge the penalty. For companies that have not reported the unpaid debts within three months of the due date, the only option to discharge the penalty is to pay the debt.

If, however, the company has reported the unpaid amounts within three months of the due date, there are more options:

  1. payment of the debt in full;
  2. have a liquidator appointed to wind up the company; 
  3. appoint an administrator to the company;
  4. appoint a small business restructuring practitioner; or
  5. prove a defence to the director penalty notice.

Your company must undertake these actions within 21 days of the issue of the notice. If they are not, the director is liable until the debt is paid in full. So, the ATO may commence Court proceedings against you for the debt in full.

The clock starts ticking on the director penalty notice from when it is posted, not when you receive it. That is, you have 21 days to act from the date the ATO posted it. Importantly, you must always register your current address with ASIC. Suppose you received the director penalty notice late due to changing addresses. In that case, this is unlikely to be considered a defence to the director penalty notice.

Defences for Receiving the Director Penalty Notice

There are some defences a director may rely on, for example, illness. Even so, the ATO will consider whether the director took all reasonable steps to comply with their PAYG and superannuation obligations.

Consequences of Non-Compliance

A director may be personally liable to repay the company’s debts where they have not complied with the director penalty notice. The ATO may recover the unpaid amounts directly from the director and the director’s assets.

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Key Takeaways

Usually, a company director is not personally liable for the company’s activities or its debts. However, there are circumstances where a director does not have protection, for example, where a company has unpaid PAYG and SGC liabilities. If the company has outstanding debts, the ATO may issue the director with a director penalty notice. Where the director fails to comply with the notice, the ATO may choose to commence proceedings against the director. This is to recover the unpaid amounts from the director’s personal assets. 

If you need more information on director penalty notices, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What does the penalty notice state?

The penalty notice will show the date of the notice and the unpaid amount of PAYG or SGC liabilities.

How does a director avoid receiving a director penalty notice?

As a director, you must ensure that you pay your PAYG and superannuation obligations. In addition, check you do not have outstanding ATO tax debts and keep the company’s tax returns and records up to date.

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