Director Penalty Notices issued by the Australian Taxation Office (ATO) to the company’s directors.

The Australian Taxation Office (ATO) can recover unpaid PAYG Tax, GST and superannuation owed by a company from the company’s directors by issuing the directors with Director Penalty Notices. The ATO can issue two types of Director Penalty Notices:

21-Day Director Penalty Notices

A company is required to:

  • Report and pay PAYG Tax withheld from wages to the ATO each month or quarter.
  • Report and pay net GST payable  to the ATO by due dates.
  • Pay superannuation for its employees by due dates.
  • If superannuation is not paid by due dates, lodge a Superannuation Guarantee Charge Statement (“SGC Statement”) with the ATO, reporting unpaid superannuation. The ATO will then collect unpaid superannuation on behalf of employees as Superannuation Guarantee Charge.

If a company fails to pay PAYG Tax, GST and superannuation but it lodges and reports its liabilities to the ATO within three months of due dates for BAS and IAS and by the relevant deadlines for SGC Statements the ATO can issue Director Penalty Notices to the company’s directors. The directors will become liable for the company’s unpaid PAYG Tax, GST or superannuation claimed in the Director Penalty Notice. However, they can avoid liability if:

  • The PAYG Tax, GST or superannuation is paid; or
  • The company is placed in voluntary administration or liquidation within 21 days of the date of the Director Penalty Notice.

“Lockdown” Director Penalty Notices

If a company fails to pay PAYG Tax, GST or superannuation and it also fails to report these liabilities to the ATO by the deadlines set out below, the company’s directors are automatically liable for unpaid PAYG Tax, GST and superannuation unless these are subsequently paid by the company. If this applies:

  • The ATO can and will issue Director Penalty Notices to recover unpaid PAYG Tax, GST and superannuation from directors.
  • The ATO can and will estimate a company’s PAYG Tax, GST and superannuation liabilities and use these estimates to issue Director Penalty Notices.
  • Voluntary administration or liquidation will not avoid directors’ liability.
  • The ATO can and will issue Director Penalty Notice after a company is in voluntary administration or liquidation.

The relevant deadlines for lodgement are; for BAS and IAS, three months from when lodgement is due and for SGC Statements within one month and 28 days of the end of quarter during which superannuation was accrued.

Liability Under Director Penalty Notices

If you become liable under a Director Penalty Notice then the Director Penalty Notice debt is just like any other tax debt. As a result of this the ATO can and will:

  • Obtain a Judgment for the amount of the debt;
  • Use the Judgment to obtain a Bankruptcy Notice and then bankrupt you; or
  • Issue a Garnishee Notice to take funds from your bank account or from your wages.

If a company has multiple directors, the ATO will often target its recovery action at the director or directors it considers have the best ability to pay. The ATO will have certain information on a director’s personal financial position based on their past Income Tax Returns.

Incoming and Outgoing Directors

The ATO can issue a Director Penalty Notice to an incoming director once the director has been in office for more than 30 days.

If a director resigns his or her directorship, the ATO can still issue a Director Penalty Notice for PAYG Tax, GST or superannuation incurred, but not paid while the person was a director of the company.

Defences to Director Penalty Notice Claims

A defence may be available to a Director Penalty Notice claim if it can be established that:

  • As a result of illness or another acceptable reason, a director was not managing the company at the time the liability which gave rise to the Director Penalty Notice was incurred;
  • A director took all reasonable steps to ensure that a company met its obligations to pay PAYG Tax, GST or superannuation;
  • A director took all reasonable steps to wind up the company or appoint a voluntary administrator to the company to avoid director penalty liability; or
  • A director took reasonable steps to ensure that the company complied with its obligations to pay superannuation.

Defences to a claim by the ATO under a Director Penalty Notice are difficult to rely on and often legal assistance will be required, which can be costly.

How to Avoid Director Penalty Notice Liability

The ATO can issue a Director Penalty Notice to an incoming director for historical amounts of PAYG Tax, GST or superannuation.  This applies even if the person is appointed and then resigns as a director.

  • If your company is facing financial difficulty, get professional advice at an early stage – or immediately if a Director Penalty Notice is received.
  • Seek to negotiate and then enter into a payment arrangement with the ATO. The ATO generally will not issue a Director Penalty Notice if they believe a payment arrangement is being negotiated in good faith, and they will not issue a Director Penalty Notice if a payment arrangement is in place and being complied with.
  • Lodge BAS, IAS and SGC Statements at worst, within the time periods set out above. If these lodgements are made but required amounts are not paid, you will still have 21 days from the date of a Director Penalty Notice to place a company in voluntary administration or liquidation to avoid personal liability.
  • Make sure your postal address is up-to-date in records maintained by the ASIC. Director Penalty Notices are issued to a director’s personal address as recorded with the ASIC. Non-receipt of a Director Penalty Notice due to a change of address is not a defence to a claim by the ATO.

If a voluntary administrator or liquidator is to be appointed to avoid liability, the time to make such an appointment is within 21 days of the Director Penalty Notice being issued – not 21 days from the date it was received.

Before agreeing to be a director ensure a company has no PAYG tax or superannuation payable.

Options if You are Liable Under a Director Penalty Notice

If you are liable under a Director Penalty Notice and the company involved is unable to pay the debt, you should:

  • Promptly seek advice from a qualified professional;
  • If possible, negotiate a personal payment arrangement with the ATO for the amount claimed – we have assisted numerous company directors with this;
  • If there are other directors of the company, seek that they make a contribution to the ATO to pay a proportionate part of the liability;
  • Consider whether it may be possible to put forward a proposal for a personal insolvency agreement (a formal agreement under the Bankruptcy Act 1966 (Cth)) to avoid bankruptcy; or
  • If there are no other alternatives, consider filing for bankruptcy.

Defences to a claim by the ATO under a Director Penalty Notice are difficult to rely on and often legal assistance will be required, which will be coslty

If you or your company has a tax debt which it is unable to pay you should urgently obtain appropriate advice and assistance to avoid the ATO taking recovery action in respect of its debt.

If you would like us to assist you, please don’t hesitate to contact us for an initial no obligation free consultation.

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