Most directors are aware of the importance of compliance with PAYG withholding and superannuation guarantee charge obligations. However, what happens when the company fail to pay Superannuation installments for their staff? What are the consequences for the directors?
Since 1993 the Australian Taxation Office (ATO) has had the power to recover company liabilities through the director’s penalty regime. These new policies were aimed at ensuring that directors realise that they have a responsibility to ensure that the company meets its tax obligations. Further, if these tax obligations could not be met, directors would be compelled to immediately place the company into voluntary administration or liquidation. Directors were encouraged to comply with these obligations through the threat of personal liability for a penalty in the same amount as the outstanding tax liability.
The Commissioner of Taxation is able to commence proceedings against a director for payment of a penalty 21 days after issuing a ‘Directors Penalty Notice’. A DPN essentially gives the director notice of the outstanding liability, and provides them with time to arrange for the company to make full payment of the debt amount, enter into an installment arrangement, or place the liable company into voluntary administration or liquidation.
The ATO can make estimates of the amount of the tax liability where a company has failed to make lodgments. The Director’s Penalty Notice is then issued on the basis of this estimate.
What do the June 2012 amendments mean?
Further, the changes restricted a director’s ability to evade personal liability through placing the liable company into liquidation or voluntary administration. The changes put forward in June 2012 divide tax obligations owed into two categories:
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Obligations that are unpaid and unreported for more than three months beyond the due date for reporting; and
- Obligations that are unpaid by the due date but are reported in Business Activity Statements (BAS) and Superannuation Guarantee Charge (SGC) Statements within the three month period of the due date for reporting.
In the first situation, unpaid and unreported obligations become a penalty imposed personally upon a director when the DPN is issued. However, a director cannot escape personal liability by placing the company into voluntary administration or liquidation. The only way to remove the penalty is for the director or the company to make payment of the debt in full.
In the second situation, a director can negate personal liability for unpaid but otherwise correctly reported obligations by placing the company into voluntary administration or liquidation.
These changes encourage directors to further adhere to reporting and tax obligations. The imposition of personal liability on a director that cannot be waived other than by transparent reporting in compliance with ATO requirements or full payment of the tax obligation.
What defences are available?
If a director can establish that the director was not involved in management of the company at the time the liability was incurred for the reason that the director was ill (or for some other good reason) and it would be considered unreasonable for the director to take place in the management of the company during this time, then the director can escape personal liability for the obligation.
Alternatively, a director can escape personal liability for any outstanding tax obligations if the director took all reasonable steps to:
- Cause the company to meet its tax obligation in full;
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Cause the company to appoint an administrator; or
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Place the company into liquidation.
You should seek legal advice immediately if you receive a DPN. You must remember that you have 21 days to take action from the date of the DPN before the ATO can/may take action against you to recover the penalty amount.
Where the DPN is received where PAYG withholding or SGC obligations are unpaid and unreported within 3 months of the due date, then we can consider options such as:
- Making payment of the debt in full;
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Entering into an installment arrangement with the ATO to make payments; or
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Place the company into liquidation or voluntary administration.
Where the liabilities are unpaid or unreported for 3 months after the due date, then the options are restricted to:
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Making payment of the debt in full; or
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Entering into an installment arrangement with the ATO to make payments.
Nautilus Law Group can assist you to reduce your liability to the extent possible where you have received a DPN. We can liaise with your accountant and the ATO where required to attempt to reduce your personal liability for payment of the tax obligations.
If you need advice, or would like further information, we welcome you to contact our offices on (07) 5574 3560 or email info@nautiluslaw.com.au. We thank you for considering Nautilus Law Group.
This article is intended only to provide a summary and general overview of matters of interest and the law. It is not intended to be comprehensive and it does not constitute legal advice. While we take all necessary steps to ensure that the information is current or accurate, we cannot guarantee its accuracy or currency. You should always seek legal or other professional advice before relying or acting upon any of the above content or information.
Submitted by: Katrina E. Brown BA JD ATIA TEP SSA
