Director Penalty Notices issued by the ATO

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Personal liability for all directors

When a company has failed to pay to the Australian Taxation Office ('ATO') PAYG amounts for its employees, superannuation amounts, GST, Wine Equalisation Tax and Luxury Car Tax, each director may be personally liable for the total amount of the unpaid liabilities. This arises when the ATO issues a Director Penalty Notice to each of the directors of the company.

For example, where there are 2 directors and the tax debts are $100,000, the company and each director have a liability of the same amount of $100,000. In other words, the liabilities are in parallel with each other.

Each director's assets may be at risk of loss if the director is unable to pay the whole amount of the company's liabilities. A director's assets may include; the family home, vehicles, shares and money.

All directors need to take steps to best protect their legal rights where there are circumstances that they may be personally liable for the unpaid tax liabilities of a company.

What is a Director Penalty Notice?

When a company fails to meet its obligations under the Taxation Administration Act 1953 (‘TAA’), by failing to pay to the ATO:

  1. PAYG amounts withheld by the company from employee salaries;
  2. superannuation (SGC) amounts;
  3. GST;
  4. Wine Equalisation Tax (WET); or
  5. Luxury Car Tax (LCT)
the Commissioner of Taxation may issue a penalty notice to each of the directors of the company for the amount not remitted to the Commissioner. A director therefore has a personal liability in these circumstances arising from Division 269 of Schedule 1 to the TAA.

Several scenarios have caused great difficulty for many directors including:

  1. a significant change in trading conditions cause the company to be unable to remit the amounts payable to the Commissioner;
  2. the company pays its outstanding moneys to the Commissioner for PAYG, however the amount is applied against income tax, administrative penalties and/or general interest charge liabilities of the company;
  3. independent contractors of a company being found to be employees and amounts of PAYG not being withheld from moneys paid to the staff;
  4. the director’s address details are not up to date on the ASIC register and they fail to receive notification of a director penalty notice;
  5. key warning signs are not recognised as a problem such as; multiple overdue BAS returns, overdue creditor payments, or a dispute with a major debtor causing a cashflow problem;
  6. a two director board where one director as Chairperson has a casting vote or where the board becomes deadlocked and consequently the directors fail as a board to not cause the company to make payment of its tax liabilities, an administrator is not appointed to the company or the company is not wound up within a period of 21 days of receiving a notice;
  7. a director or senior manager withholds or falsifies important financial information which indicates the company has not paid PAYG, GST, WET, LCT and superannuation amounts;
  8. their appointment was as a sole director, however, they were advised they were appointed as a director with other people and they were not involved in the day-to-day affairs of the company;
  9. the sole director appoints his wife as a director without her knowledge and consent; and
  10. a director, company secretary or accountant fails to lodge a Form 484 to notify ASIC of the removal of a director who has resigned.

Is the director penalty locked down?

A director penalty will be 'locked down' if the company has not lodged BAS returns within 3 months of the due dates or SGC returns within 28 days of the end of the quarter. A director penalty notice may be issued at any time, even after a company has an administrator or liquidator appointed.

Can the ATO estimate the amounts payable?

The Commissioner may issue an assessment to a company for an estimated amount of PAYG, GST or SGC if the company has not lodged its returns.

Who is considered to be a director under the Director Penalty Notice regime?

A Director Penalty Notice from the ATO may be issued to all directors of companies, including de facto directors and shadow directors.

Who is a de facto director?

A person who is not validly appointed as a director, but who acts in the position of director will be a de facto director of a company. A person may be considered to be a de facto director if they exercise (for example) top level of management functions, because outsiders would have perceived their role as a director (eg. they were described as a consultant but their duties were that of a director), the person was a signatory on a bank account, or because they held themselves out as a director. A de facto director could include; a former director, a person disqualified as a director or a person who was not validly appointed as a director.

Who is a shadow director?

If the appointed board of directors are accustomed to act in accordance with the instructions or wishes of a person, then this person may be considered to be a shadow director. The purpose of the law is to identify persons with real influence over the corporate affairs of the company, however, this does not extend to the company’s professional advisers such as lawyers and accountants.

How do I know if I may be a de facto or shadow director?

The facts of any situation must be considered as a whole to ascertain whether a power to control was exercised by the de facto or shadow director. Relevant factors will include;

  1. the specific duties carried out by the person;
  2. size of the company; and
  3. internal practices and structure of the company.
Each case is different and care must be taken in considering all the relevant issues. Examples where a person may be alleged to be a shadow director include; where the person was authorised to sign cheques for the company, where the registered directors act on the instructions of a person, or where the person is doing the work of a director.

Do I need to respond to the ATO about a Director Penalty Notice I have received?

Yes. When a Director Penalty Notice is received, you need to take steps to advise the Commissioner in writing of any defences you have. There are statutory time limits imposed under the Taxation Administration Act 1953 (Cth) for disclosing information which concerns a defence to a DPN. A failure to respond to the ATO will have serious consequences for protecting your legal rights against the ATO in relation to the personal liability which you are alleged to have in connection with a company’s failure to pay (for example) any PAYG amounts and superannuation.

What can a director do to protect themselves?

There is often no single strategy which will ensure a director can avoid a penalty arising or limit the size of the penalty, however, directors can take proactive and practical steps such as:

  1. ensuring their details are up-to-date with ASIC;
  2. checking the bank statements or bank balance of the company;
  3. ensuring that regular financial information is obtained from the company’s accountant;
  4. conducting due diligence at regular intervals on the company;
  5. ensuring that the board of directors meet regularly to discuss the business of the company;
  6. resigning as a director if you are unable to obtain information when requested (unless you are a sole director); and
  7. obtaining legal advice.

Can a sole director resign as director of a company?

No. Under legislative reforms made to the Corporations Act 2001 in 2021, a sole director of a company is unable to resign as a director. An ASIC Form 484 or Form 370 will not be processed by ASIC. The sole director however can be replaced by another director.

What can you do if you receive a Director Penalty Notice?

The Australian Taxation Office is taking an increasingly aggressive approach to non-compliance by companies. A director can seek to avoid or limit any penalty amount by:

  1. resigning as a director (unless you are the sole director) and notify ASIC of your resignation without the consent of any other director;
  2. making an application to the Court to appoint a liquidator if the company is insolvent; or
  3. raising a statutory defence to the penalty claimed by the ATO in legal proceedings.

Conclusion

All directors need to ensure they are aware of the circumstances of the company and their obligations because each director may have a personal liability in the future for certain unpaid tax liabilities of the company. Any director who is not sure about how best to protect their legal rights should obtain legal advice from a specialist lawyer.


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