Company directors must be careful to avoid personal liability, especially in issues concerning taxation and superannuation
It’s a fundamental legal concept that Australian companies have a separate legal personality. They’re shrouded in a corporate veil, protecting their directors from personal liability. But in some circumstances, the veil can be lifted. For example, failure to meet taxation and superannuation obligations. This allows the Australian Taxation Office (ATO) to issue a director penalty notice.
What are director penalty notices? Is it possible to avoid them? What steps should you take if you receive one?
What are Director Penalty Notices?
Company directors must ensure their entities meet obligations concerning:
- Pay As You Go (PAYG) tax
- Superannuation Guarantee Charges (SGC)
If your company fails to do so, the ATO can issue a director penalty notice, requiring rectification within 21 days. After this time, the directors become personally liable for those obligations.
If the debt is reported but unpaid, the ATO can also require the company to appoint an administrator or place the company into liquidation. Director penalty notices are often closely connected to insolvent trading.
Once a penalty notice is issued, the only way to avoid personal liability is to pay the debt within the required time, appoint an administrator or commence the liquidation process. The ATO’s options for debt recovery include:
- Garnishee options (in which a third party debtor pays the debt directly to the ATO)
- Using company tax credits to pay the penalties
- Legal action
New company directors also take on this liability, even for old debts. Before entering a company directorship, prospective directors must conduct their due diligence by thoroughly scrutinising the company’s financial position.
Former company directors can remain liable for any debts incurred during their tenure.
Any situation in which the corporate veil may be lifted is a significant concern for company directors. In the past few years, the ATO has confirmed its willingness to issue director penalty notices. In its 2018-2019 Annual Report, the ATO revealed that it had approved more than 800,000 payment plans, amounting to more than $16 billion.
Following the COVID-19 emergency relief efforts, it’s clear the Australian Government is prioritising the business sector and its contribution to the national accounts. Although it’s a time of deep financial stress, the penalty notice scheme is a significant source of revenue for the Government. There will be a delicate balancing process as the Government tries to secure all possible revenue streams while giving businesses as many opportunities as possible to continue trading.
What are the defences to a director penalty notice?
It’s possible to raise a defence to a director penalty notice. Any defence must be provided to the ATO in writing, and it must apply to the entire period in which you had the obligation.
It’s not an acceptable defence to have relied on others for advice, for example, accountants, lawyers and other directors. You must actively stay informed of the company’s activities, especially PAYG and SGC obligations.
Defences to penalty notices include:
- You weren’t involved in the company’s management during the time the debt arose because you were suffering from an illness or some other significant personal event prevented you from being involved
- You did everything reasonably expected of you to pay the debt, appointed an administrator or put the company into liquidation
- You followed the legal requirements for SGC payments
Crucially, claiming that you didn’t receive the notice in time (or at all) isn’t an acceptable defence. The ATO will send the notice to your address, as registered with ASIC. You must ensure your details are updated with ASIC as soon as you become a company director, and regularly check address details for the duration of your directorship.
The process of raising a defence isn’t simple. It’s a matter of carefully assessing the company’s situation and finances against the requirements of legislation, case law and economic climate.
If you wish to defend a director penalty notice, you’ll need legal advice as soon as possible.
How do I avoid a director penalty notice?
The obvious answer to avoiding director penalty notices is to pay taxation and superannuation obligations on time and in full. But in our climate of COVID-19, this isn’t a straightforward process for many companies, especially if cash flow has evaporated.
If your company is at risk of a director penalty notice, or if it’s experiencing financial difficulties, there are some steps you can take to try and avoid a notice being issued:
- Make sure your company meets superannuation and taxation reporting obligations before the ATO’s deadlines (usually, this is by way of a Business Activity Statement and an SGC Statement)
- Seek financial and legal advice as soon as possible if you believe your company may be heading into cashflow problems. This will give you the best chance of understanding and assessing your options
- If you are in financial difficulty, continue to report taxation and superannuation obligations to the ATO. This will trigger the 21-day period in which to take action before you become personally liable
- If you can’t pay on time, speak to the ATO about a payment arrangement
How does anti-phoenixing legislation relate to director penalty notices?
Between February 2019 and April 2020, new Australian laws came into effect, aimed at preventing companies from disposing of assets to avoid obligations to their creditors. This activity is known as illegal phoenixing. Company directors (including de facto directors and shadow directors) are the target of the new laws.
Directors can now be personally liable for a company’s Goods and Services Tax (GST) obligations. In other words, penalty notices can now be issued for outstanding GST. If the issue isn’t resolved within the 21-day timeframe, the company directors will be personally liable to pay the GST.
When should I seek legal advice?
Contact us for legal advice if:
- Your company is struggling to meet its taxation obligations
- Your company is at risk of insolvency
- You’re a new director and are concerned about the financial state of the company
If you’ve received a director penalty notice, you’ll need urgent advice because the time limit in which to respond is strict. Failure to respond within 21 days could leave you with personal liability for the company’s debts.
During the 21 days, we will need to assess whether your company has the means to pay the money owing or whether voluntary administration or liquidation are better options. We will need time to evaluate the company’s financial position. The sooner you seek our advice, the better we can respond.
Director penalty notices are a ticking clock. The potential impact can be enormous, which is why you need to act quickly. Get legal advice at the first sign of financial difficulty and especially if you’ve been issued with a notice.
For more information about director penalty notices, please contact Trevor Withane: