As a company director, you are responsible for ensuring that your company’s tax and super obligations are reported and paid on time. You can become personally liable for your company’s unpaid amounts of Goods and Services Tax (GST), Pay as you go withholding (PAYGW) and Super guarantee charge (SGC). Amounts that you become personally liable for are called director penalties. Once the ATO issues a director penalty, they can recover the penalty amounts from directors personally.

New directors

It is important that you check whether the company has any unpaid or unreported GST, PAYGW and SCG liabilities, as you can become personally liable for these liabilities once appointed as a director.

To avoid liability for director penalties due prior to your appointment, ensure that within 30 days of your appointment, the company does one of the following:

  • Pays any debts in full for PAYGW, net GST from 1 April 2020 (including luxury car tax (LTX) and wine equalisation tax (WET) amounts) and SGC from 1 April 2012.
  • Appoints and administrator pursuant to section 436A, 436B or 436 C of the Corporations Act 2001.
  • Appoints a small business restructuring practitioner pursuant to section 453B of the Act
  • Commences winding up (within the meaning of the Corporations Act 2001).

Remember, even if you resign as a director within the 30-day period, you will still be liable for the company’s unpaid PAYGW, net GST or SGC liabilities that were due before your appointment.

Becoming a director

Once a director, you become responsible for ensuring the company meets its PAYGW, net GST and SGC obligations in full, by the due date.

If these obligations are not met, you become personally liable for directors’ penalties unless you take steps to ensure the company lodges and pays:

  • PAYGW by the due date
  • Net GST (as well as LCT and WET amounts) by the due date, and
  • Superannuation guarantee (SG) to employees’ superannuation funds by the due date.

Multiple Directors

If a company has multiple directors, the amounts owed will likely be the same for all directors. This is because a company liability (what the company owes) and the resulting director penalty liability are parallel in nature. When the ATO recovers director penalties, they will do so equally from each director depending on each directors’ circumstances.

What happens when you cease to be a director

When you resign as a director, you will remain liable for director penalties for liabilities of the company that fell due before the date of your resignation as well as those that fell due after your resignation if:

  • For PAYGW and net GST (including LCT and WET), the first withholding event in the reporting period occurred before your resignation.
  • For SGC liabilities, the date the charge became payable

If you resigned as a director before:

  • The first withholding event in that period for PAYGW and net GST, you will also be liable for any unpaid liabilities for reporting periods that started while you were a director
  • The date the SGC became payable, you will also be liable for any unpaid liabilities for reporting periods that started while you were a director.

Director penalty notice (DPN)

A (DPN) is a notice issued by the ATO that allows them to recover the company’s unpaid amounts. The notice will outline the unpaid amounts and remission options available to you.

The ATO can recover unpaid amounts in several ways:

  • Issuing garnishee notices
  • Offsetting any of your tax credits against the director penalties
  • Initiating legal proceedings against you to recover the director penalty

Parallel Liability

Once the ATO issues DPN’s, they may also commence or recommence recovery action from each director personally (parallel liabilities). The Commissioner can pursue either the company or the directors to recover the debt.

Remitting director penalties

A DPN can be remitted depending on when the PAYGW and net GST payable was reported to the ATO.

Liabilities reported within 3 months of due date (or in the case of a new director, within 3 months from their date of appointment) the penalty can be remitted by ensuring the company either:

  • Pays the debt in full
  • Appoints an administrator under section 436A, 436B or 436C of the Corporations Act 2001
  • Appoints a small business restructuring practitioner pursuant to section 453B of the Act
  • The company beings winding up (within the meaning of the Corporations Act 2001)

If unpaid net GST and PAYGW is reported more than 3 months after the due date (or for a new director more than 3 months after their date of appointment), or if the liabilities remain unreported after 3 months, the only way to remit the director penalty is to pay the debt in full.

SGC Liabilities

Remission of director penalties related to SGC amounts depends on when the ATO has been notified of those SGC amounts. If unpaid SGC amounts are reported by the due date for the SGC statement, the company can do ONE of the following:

  • Pay the debt
  • Appoints an administrator under section 436A, 436B or 436C of the Corporations Act 2001
  • Appoints a small business restructuring practitioner pursuant to section 453B of the Act
  • The company beings winding up (within the meaning of the Corporations Act 2001)

Paying the debt in full is the only way to remit the amount if the unpaid amount of the SGC obligation is reported after the due date OR any part of the liability remains unreported.

Once a DPN is issued

Once the ATO issue a DPN, you will have 21 days to either:

  • Pay the penalty amounts in full
  • Engage with the ATO to negotiate a payment plan for the company debt. Note that the ATO may still offset your personal credits against the debt.

ATO Estimates

If a company fails to report PAYGW, net GST or SG obligations by the due date, the ATO may proceed to make a reasonable estimate of the unpaid and overdue amounts.

Director penalty provision also apply to these estimated liabilities. An estimate is due and payable by the company on the day the ATO gives the company the estimate notice.

These ATO estimated amounts of PAYGW, net GST or SGC are treated as unreported amounts.

Defences to DPN’s

There are circumstances in which a director may not be liable for director penalties which you can ask the ATO to consider prior to legal recovery proceedings commencing.

These defences are:

  • You did not take part (and it would have been unreasonable to expect you to take part) in the management of the company during the relevant periods because of the illness or other acceptable reason
  • You took all reasonable steps, unless there were no reasonable steps you could have taken, to ensure that one of the following happened: –
    • The company paid the amount outstanding
    • An administrator was appointed to the company
    • A small business restructuring practitioner was appointed to the company
    • The directors began winding up the company (within the meaning of the Corporations Act 2001)
  • In the case of unpaid SGC liability, the company treated the Superannuation Guarantee (Administration) Act 1992 as applying in a way that could be reasonably argued, was in accordance with the law, and took reasonable care in applying that Act.

The Court’s View

The courts have held:

  • a director penalty defence must be proved for the entire period the director was under the obligation.
  • it is not a defence if the director relied on others (including fellow directors and professional advisers) to ensure the company’s obligations were met.
  • the natural meaning is that the combined defences must cover the whole period between the breach of the obligation on the due date, and the expiry of the notice

The non-participation of a director in the management of a company will usually involve a breach of the duty, whether the director is aware of this or not.

Do you have questions about Director Penalties? Please don’t hesitate to contact our experienced Newcastle commercial lawyers at Butlers Business Lawyers on (02) 4929 7002 or fill out an enquiry form on our website.