When ATO payment plans are personally guaranteed

Director penalty notices: unlocking the mystery

In recent instances where Worrells has been appointed as external administrator, directors have encountered unexpected surprises regarding payment plans negotiated prior to their company's collapse. These plans, it turns out, had effectively been personally guaranteed by the directors, leaving them accountable for the company's debts out of their own pockets.

Under the director penalty regime, company directors automatically become personally liable for unpaid superannuation[1], “net” GST (goods and services tax, wine equalisation tax, and luxury car tax)[2] and pay as you go withholding (PAYG(w)) as soon as the debts become overdue.

Initially, directors face what's termed a "non-lockdown" director penalty, a stage where their personal liability exists provided the company reports the debt to the Australian Taxation Office (ATO) within prescribed timeframes:

For superannuation:

• By the due date for lodgment of the superannuation guarantee charge (SGC) statement (being one month and 28 days after the end of the relevant quarter).

For pay as you go withholding:

• Within three months of the due date for lodgment of business activity statements (BAS) and instalment activity statements (IAS).

The director will have an opportunity to extinguish their personal liability for a non-lockdown director penalty if they place the company into external administration[3]  before or within 21 days of a director penalty notice (DPN) being issued.

However, there exists a more severe form of penalty known as a "lockdown" director penalty. Unlike the non-lockdown version, this penalty cannot be extinguished by placing the company into external administration.

Lockdown director penalties are created in two ways:

• The first is by failing to report the debt to the ATO within the prescribed timeframes for lodgment referred to above. For this reason, there is a real incentive for directors to cause the company to comply with its obligations to notify the ATO of the unpaid debt within the required timeframe.

• The second is by failing to place the company into external administration within 21 days of a DPN being issued for a non-lockdown director penalty.

It is the second point that is the subject of discussion below.

In a number of recent external administrations handled Worrells, companies had negotiated payment plans with the ATO after a DPN had been issued for non-lockdown director penalties. The payment plans ultimately failed, and the companies were placed into external administration at a later date.

Unfortunately for directors in these circumstances, as the 21 days had come and gone and the company had not been placed into external administration inside that time limit, this resulted in the non-lockdown director penalty amounts being automatically converted to lockdown director penalties. As a result:

• As part of the payment plan, the directors had effectively provided a personal guarantee for the non-lockdown director penalty amounts included on the DPN; and

• They would need to pay the debts personally if the company was unable to discharge the obligations in full – which is what transpired.

We are increasingly seeing this scenario play out.

The key message is, directors should proceed cautiously when negotiating a payment plan after a non-lockdown DPN has been issued. This includes seeking advice and considering all available options, including external administration – which would relieve the director from their personal liability. This might involve using the small business restructuring or voluntary administration regimes to strike a deal with creditors, or liquidation.

If after receiving advice a director chooses to negotiate a payment plan instead of placing the company into external administration, they will at least be doing so having been fully informed of their options. They will also understand the potential consequences of their decision as it affects their personal liability.

If your client has an outstanding ATO debt or superannuation obligations, and/or has received a DPN, Worrells can assist by reviewing the company’s financial position and provide advice on the available options.

[1] From 30 June 2012

[2] From 1 April 2020

[3] By appointing a small business restructuring practitioner, voluntary administrator or liquidator