Director Penalty Notices

If your company is falling behind with payment of certain taxes, directors may be held personally liable.

To recap, there are a number of advantages in operating a business through a company structure. Chief among them is asset protection. Because a company is a separate legal entity, it is liable for any debts incurred while trading.

Directors, it is widely believed, are protected – they have no personal liability for the debts or actions of the company they run, and therefore their personal assets are not at risk from creditors in the event that their business folds or is sued.

While this is largely true, Director Penalty Notices (DPNs) stand as an exception to this general rule, and can see directors held personally liable for certain ATO-related debts owed by their company.

Which liabilities?

Originally, the DPN regime applied only to pay-as-you-go withholding (PAYGW) liabilities. This includes PAYGW amounts withheld (or that should have been withheld) from payments made to:

– Employees (from salary, allowances etc.)

– Other workers that you have a PAYGW voluntary agreement with such as contractors, and

– Businesses that fail to quote their ABN but were required to do so.

In 2012, the DPN regime was extended to Superannuation Guarantee (SG) amounts SG amounts can be payable to not only employees, but also certain contractors.

The DPN regime also now applies to outstanding GST, Luxury Car Tax, and Wine Equalisation Tax (WET) liabilities as part of Activity Statements.

Who?

DPNs can be issued to directors in relation to liabilities/debts that arose prior to their appointment as well as after their appointment. New directors have 30 days (commencing on the day of their appointment) before they become liable for the above types of debts. Given this strict liability in respect of amounts that predate your appointment, prospective directors need to do due diligence of a company before accepting appointment. Does the company have DPN amounts or lodgements outstanding?

The DPN regime also applies former directors. If you are no longer a director, you remain liable for director penalties equal to the unpaid  DPN liabilities of the company that were due before the date of your resignation.

The DPN will typically be posted to either a  director’s home or business address held by ASIC. Even if it is not actually received (for example, the directors may not have updated their address) liability applies from 21-days after the DPN is posted. It’s important therefore that director addresses with ASIC remain up-to-date.

Defenses

Directors will not be liable for amounts contained in a DPN if they successfully invoke any of the following three defenses:

1. You did not take part (and it would in the circumstances been unreasonable to take part) in the management of the company during the relevant period because of illness or another good reason

2. Corrective action is taken by taking all reasonable steps to ensure one of the following three things happened:

– The company paid the outstanding liability

– An administrator was appointed to the company, or

– The directors began winding up the company (within the meaning of the Corporations Act).

3. In the case of unpaid SG, the company interpreted the law as applying in a way that could be reasonably argued was in accordance with the law. For example, if a company has not paid an employee SG because it reasonably believed that the worker was a contractor, then a defense may be available.

Take-home message

– Company directors are not immune from liability for certain ATO-related debts owing by their business

– Ensure SG, PAYGW, GST/LCT/WET payments and lodgements are up-to-date

– Before becoming a company director, do due diligence and ensure payments and lodgements are up-to-date

– Keep address details up-to-date with ASIC

– Explore the option of reimbursement from the company or other directors if you have paid a DPN personally

– The ATO is cracking down on outstanding liabilities.

If you have outstanding debts of this type or you receive a DPN, touch base with us.

DISCLAIMER: This information is general in nature. It has been prepared without taking into account your objectives, personal or business circumstances, financial situation or needs. Because of this, you should, before acting on this information, consider in consultation with your adviser, its appropriateness, having regard to your objectives, personal or business circumstances, financial situation and needs.