Generally, a company director cannot be held personally liable for the company’s activities, unless they breach their legal director’s duties. However, there are circumstances where a director is personally liable for the company’s debts. One example is where a director receives a director penalty notice from the Australian Tax Office (ATO). This article will set out what you need to know about director penalty notices.

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. 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.

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 are required to 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.

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, referred to as 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. They can either:

  • pay the debt;
  • place the company into liquidation or voluntary administration; or
  • come to an arrangement with the ATO.

Where the company appoints a liquidator or an administrator within 21 days, the director may escape personal liability for the debt. Where you have placed the company into voluntary administration or liquidation, 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 the company fails to lodge their returns within three months. Where a director gets a lockdown penalty notice, the director 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.

What Does the Notice State?

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

Who Can Be Issued With a Notice?

Any current director of the company may receive a director penalty notice. 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. Incoming directors should, therefore, 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.

Are There Any 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.

What Are the Consequences of Not Complying With a Director Penalty Notice?

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.

How Does a Director Avoid Receiving a Director Penalty Notice?

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

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 is not protected. 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 have any questions, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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