Directors of companies should be aware that they may personally be subject to penalties where the company does not comply with its tax obligations.

Those obligations are paying PAYG withheld (from employees’ salaries) amounts or to pay superannuation guarantee charge to the Commissioner of Taxation, including where the Commissioner estimates PAYG withholding liabilities and/or superannuation guarantee charge.  Legislation is currently before Parliament to extend the scope of the director penalty regime to unpaid GST liabilities.

For the purposes of the director penalty legislation, “director” has the meaning given by the Corporations Act 2001, which means that “director” includes both a shadow director (a person in accordance with whose wishes the directors of a company are accustomed to act) and a de facto director (a person who acts as a director without being validly appointed as one).

Director’s obligations and liability to director penalties

The legislative regime for director penalty notices states that:

  • directors have an obligation to cause the company to pay the above types of liabilities on their due day for payment of the liability;
  • directors will remain under that obligation until either the company pays the due amount; or
  • an administrator of the company is appointed under the Corporations Act 2001 or the company begins to be wound up.

A person who was a director on the due date for payment of a relevant unpaid company liability is liable to pay a penalty equal to the unpaid amount of the company’s liability.  Such a person would remain liable to the penalty even if they subsequently cease to be a director.

A person who becomes a director after the due date for payment of a relevant unpaid company liability will also be liable to pay a penalty equal to the unpaid amount of the company’s liability unless within 30 days either the liability is paid:

  • an administrator is appointed to the company under the Corporations Act 2001; or
  • the company begins to be wound up.

Defences against director penalties

The following three defences are available to the director penalty:

  1. A director is not liable to a director penalty if “because of illness or for some other good reason it would have been unreasonable to expect” the director to take part in the management of the company and the director did not take part in the management of the company at the relevant times.
  2. A director is not liable to a director penalty if the director took all reasonable steps to ensure that either the company paid the relevant amount, an administrator of the company was appointed under the Corporations Act 2001, or the company began to be wound up. A director is also not liable to a director penalty if there were no reasonable steps the director could have taken to ensure that any of those things happened.
  3. A director is not liable to a director penalty to the extent the penalty resulted from the company treating the superannuation guarantee law from applying in a particular way that was reasonably arguable if the company took reasonable care. For example, if the company did not pay superannuation to a person because the company believed on a reasonably arguable basis that the person was a genuine independent contractor.

However, a body of case law suggests that these defences will be interpreted restrictively by the Courts.

Commissioner obligation to give a director penalty notice

The Commissioner must not commence proceedings to recover a director penalty until the end of 21 days after the Commissioner gives the director a director penalty notice.  The director penalty notice must specify:

  • the unpaid amount of the company liability;
  • that the director is liable to pay an equal amount by way of penalty; and
  • explain the circumstances in which the penalty would be remitted.

Remission of penalty

The circumstances in which a director penalty would be remitted depend on whether the penalty relates to PAYG withholding liability or a superannuation guarantee charge liability.

If a PAYG withholding liability is reported within 3 months of the due date (or within 3 months of appointment as a director for directors appointed after the due date), the penalty will be remitted if:

  • the company pays the liability;
  • an administrator is appointed to the company under the Corporations Act 2001; or
  • the company begins to be wound up, as long as this occurs not later than 21 days after the director is given a director penalty notice.

If a PAYG withholding liability is not reported within 3 months of the due date (or within 3 months of appointment as a director for directors appointed after the due date), the only way the penalty would be remitted would be if the liability was paid by the company.

Similarly, where the Commissioner estimates a PAYG withholding liability, the penalty would be remitted if:

  • the company pays the liability;
  • an administrator is appointed to the company under the Corporations Act 2001; or
  • the company begins to be wound up, as long as this occurs not later than 21 days after the director is given a directors penalty notice and, in cases where an administrator is appointed to the company under the Corporations Act 2001, or the company begins to be wound up, not more than 3 months after the due date for the underlying liability to which the estimate relates (or within 3 months of appointment as a director for directors appointed after the due date).

The penalty in respect of a superannuation guarantee charge liability would not be remitted unless:

  • the company lodges a superannuation guarantee statement disclosing the liability in full by the due date and the company pays the liability;
  • an administrator is appointed to the company under the Corporations Act 2001; or
  • the company begins to be wound up where this occurs not later than 21 days after the director is given a directors penalty notice.

To the extent that a superannuation guarantee statement disclosing the liability in full is not lodged by the due date, the only way the penalty would be remitted would be if the liability was paid by the company.  This is a recent change; until the passage of the Treasury Laws Amendment (2018 Measures No 4) Act 2019, directors had the same three-month grace period from the due date of the superannuation guarantee charge that applies to PAYG withholding liabilities.

Similarly, where the Commissioner estimates a superannuation guarantee charge liability, the penalty would not be remitted unless:

  • the company pays the liability;
  • an administrator is appointed to the company under the Corporations Act 2001; or
  • the company begins to be wound up by the day by which the company was obliged to pay the underlying liability to which the estimate relates.

Effect of payment

Payment of a director penalty by a director in whole or part discharges to the same extent both the corresponding liability of the company and the liability of other directors to director penalties.

Payment by the company of the corresponding liability in whole or part discharges to the same extent the liability of the directors to director penalties.

A director who pays a director penalty is given by legislation “the same rights (whether by way of indemnity, subrogation, contribution or otherwise) against the company or anyone else as if:

(a) you made the payment under a guarantee of the liability of the company; and

(b) under the guarantee you and every other person who has paid, or from whom the Commissioner is entitled to recover, a penalty under this Division in relation to the company’s obligation were jointly and severally liable as guarantors.”

Advice

Directors of companies with unpaid PAYG withholding and superannuation guarantee contributions face the very real risk of being liable for those amounts if the ATO commences action to recover such amounts.  As earlier mentioned, unpaid GST will soon be added to the list.

Therefore, directors could face bankruptcy and the loss of their hard-earned assets including the family home, cars and investments.  Their company could also be liquidated.

The ATO’s debt recovery systems are becoming more sophisticated with reduced time lags occurring between defaulting on a liability and legal debt recovery.

We at Nexia are well experienced in approaching the ATO and making satisfactory repayment arrangements to ensure that companies can meet their liabilities and directors do not receive director penalty notices.  In some cases, approaching the ATO is unnecessary with alternative actions put in place to enable the unpaid amounts being paid.  In either event, our attention to such matters is always immediate.