Many directors are aware that they can become personally liable for certain unpaid tax liabilities. Directors are under a positive obligation to cause the company to pay deducted or withheld tax or take other specific remedial action by the time it is due for payment. Such action can include placing the company into voluntary administration or liquidation.
If a director fails to cause the company to pay its tax or take other remedial action before the tax is due, they automatically become liable for a penalty in the amount of the tax that has not been paid. The provisions encapsulates anyone who was a director ‘at any time’ from when the tax was deducted to when it was payable.
The Australian Taxation Office (ATO) does not need to issue any notices or take any action to create the penalty, however the ATO is currently unable to commence proceedings to recover the penalty without issuing a Director Penalty Notice (DPN). The DPN essentially provides directors a final opportunity to extinguish the personal liability by either paying the debt or placing the company into voluntary administration or liquidation, within 21 days from the date of the notice. If they do so, they will be absolved of personal liability. The ATO uses these provisions to pursue directors of companies that fail to meet their PAYG (Pay as you go) obligations.
The Government has introduced draft legislation into Parliament to expand and refine the Director Penalty regime. The new regime:
- Will impose a personal liability on directors for unremitted superannuation contributions, in addition to unpaid PAYG. We believe that this amendment is long overdue, as it is surely unconscionable for a director to use employees’ superannuation contributions for working capital and/or to save their own skin, while leaving their employees’ superannuation unpaid;
- Allows the ATO to immediately (without first issuing a DPN) commence recovery of all director penalties when the company’s unpaid liability remains unpaid and unreported three months after the due date. This is aimed at encouraging directors to at least report the company’s obligations within three months of the due date, in which case they will still receive the benefit of the 21 day DPN notice, and still be afforded an opportunity to extinguish the personal liability by either paying the debt or placing the company into voluntary administration or liquidation;
- Provides the ATO with the discretion to prevent directors, and in some cases their associates, from obtaining PAYG withholding credits which have not been remitted to the ATO.
The amendments to extend the director penalty regime to superannuation apply if the company is required to lodge a quarterly superannuation guarantee statement on or after the date on which the amendments formally commence (being the day after the Bill receives Royal Assent).
However the effect of the transitional provisions concerning the “automatic” right to commence recovery for director penalties (which remain unpaid and unreported three months after the due date) are more controversial. The transitional provisions provide that the new regime will also apply to director penalties that were in existence before commencement of the new legislation (if those penalties were not extinguished before commencement).
You will recall that a director becomes liable for a penalty as soon as the obligation becomes overdue for payment. To be extinguished, the penalty would have been paid, remitted or discharged before the new provisions came into effect. Accordingly the ATO will, from the day after the Bill receives Royal Assent, have an automatic right of recovery against directors in cases where PAYG debts are in existence before the commencement date of the new legislation, and where the obligation was unreported three months after the due date (regardless of whether the obligation has subsequently been reported).
To make matters worse, the personal liability will not be rescinded by placing the company into voluntary administration or liquidation, meaning the only means if discharging the personal liability will be to:
– Pay the debt in full; or
– Place the company into voluntary administration or liquidation before such time that the Bill receives Royal Assent.
It is therefore important to ensure director penalties are extinguished before commencement of the new legislation. The Bill is currently before the House of Representatives, and will therefore likely become operational in the short term.