Directors personally on the ‘Tax Liability’ hook. Don’t get caught.

Posted on by Admin

8 September 2021

If a company does not pay relevant tax liabilities immediately when they fall due, the directors become automatically liable to a penalty equal to the unpaid amounts.

The Director Penalty regime applies to obligations of a company to pay:

  • Employee salary tax withheld amounts (e.g. PAYG withholding)
  • Unpaid Superannuation (ie. Super Guarantee Charge (SGC)
  • ATO estimates of PAYG and SGC liabilities
  • GST net amounts
  • GST Instalments

It allows the ATO to pierce the corporate veil, meaning directors are no longer protected by a company’s corporate structure.

The issue of a Director Penalty Notice (DPN) does not create a director’s liability. The two functions of a DPN are:

  • a preliminary step before ATO debt recovery action commences against a director; and
  • a final opportunity for a company to be placed into administration or liquidation to trigger remission of the director penalty, but only if the relevant liabilities have been notified to the ATO by the required time.

When would the ATO issue a director penalty notice?

  • ATO debt which remains unpaid
  • History of non-reporting
  • Suspicion of phoenix activity

It is important that companies have sound corporate tax governance so that directors who may not have direct oversight of the company’s tax compliance obligations are not caught out. It is crucial to emphasise the potential consequences of non-compliance to all key personnel of your company and make them aware of this regime.

Steps for new directors

If you have recently been appointed as a director of a company, you can be held personally liable for historical SGC, PAYG and GST liabilities if they remain unpaid and unreported within 3 months or more after the date of your appointment.

Accordingly, the following are the necessary steps to ensure all is in order before your appointment as a director:

  • Obtain confirmation that SGC, PAYG and GST obligations are met.
  • Review lodgement history by obtaining extracts from the company’s ATO business portal to ensure no liabilities are stated as owed.
  • Confirmation from the Public Officer that no obligations are unmet.
  • Review the company’s tax governance policy around tax obligations.
  • All directors have updated any personal details with ASIC to ensure they receive DPN as soon as possible. Directors only have 21 days from the date a DPN is issued to act and avoid personal liability.

The solution

The DPN regime connects ASIC director data with ATO company tax liabilities resulting in possible DPNs, garnishee notices, notices of intended legal action, statements of claim and bankruptcy notices. The solution is to always pay and report on time, and to make sure ASIC address details are up to date.

Forward planning by any company director that has potential liability exposure should include appropriate asset protection, business systems and an awareness of the DPN risks.

It is important that directors start taking steps now to ensure that the tax, superannuation and GST obligations of their companies are in order.

If it does become necessary to engage with the ATO, it will often be appropriate to engage expert advice as early as possible.

Don’t get caught!

If you are interested in an independent tax health check of your company’s tax obligations, contact us on 08 6311 6900.

This newsletter is current as of 8 September 2021, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
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