In previous editions of the S & W Insight, we have addressed the risks that directors face in assuming personal liability for ATO debts. Continual review of this matter is crucial as the safeguard offered by a company structure can be swiftly forfeited under specific circumstances, necessitating the involvement of a BAS agent.
It is important to remember the situations where a director can be held personally liable for ATO debts. Below we outline a couple of situations that you should be aware of.
The first situation is where you receive a Directors Penalty Notice
- The law around this area is designed to ensure that directors ensure the company complies with specific taxation and superannuation obligations. The ATO may issue a Director Penalty Notice (DPN) equal to the company’s unpaid superannuation and PAYG withholding amounts. If the director does not do one of several things within 21 days, he will then be held personally liable for the outstanding debts. To avoid being made personally liable for the debt, the director must ensure that, within 21 days, one of the following happens:
- Pay the debt
- Make an arrangement to pay the debt. This involves negotiating with the ATO to agree to pay the debt off over time.
- Place the company into voluntary administration
- Place the company into liquidation
If the company has not reported the unpaid amounts within 3 months, the only way to discharge the penalty is to pay the debt in full.
It is more likely that a payment arrangement would be accepted before the DPN is issued.
The second situation is where PAYGW and Superannuation are outstanding for more than 3 months, and the returns for these periods have not been lodged
- Since June 2012, the ATO has been given greater power to impose PAYG withholding tax and Superannuation Guarantee Contribution (SGC – currently 9.5%) on the directors and make them personally liable for the unpaid amounts. This rule applies to both new and old directors. Where a company has failed to report within 3 months of the due date the PAYG withholding tax or the outstanding SGC debts, the Directors are automatically made personally liable for the debt. This is the case even if a DPN has not been issued. As a Director, you should always ensure that the returns are lodged even if you cannot pay the tax. This way, the Director avoids personal liability for the debts unless a DPN is issued and not dealt with as discussed above within 21 days.
A couple of other issues you should also be aware of
- Directors cannot absolve themselves of potential personal liability simply by resigning as a director.
- Former directors may be liable for penalties due up to the date of their resignation.
- Former directors may also be liable for penalties after their resignation, where the first withholding event in the reporting period occurred before their resignation.
- New Directors may be liable for penalties following their appointment and debts before their appointment. New directors have 30 days from their appointment before they become liable for unpaid superannuation and/or PAYG withholding.
- Directors can avoid liability for penalties if they were ill or were not involved in the management of the company:
Please review the above, and if you have any queries in relation to the above, don’t hesitate to contact us to discuss.
Kreston Stanley Williamson Team
*Correct as of November 2017
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.