Director Penalty Notices
Director Penalty Notices
The Director Penalty regime is contained within Division 269 in Schedule 1 to the Taxation Administration Act 1953 (TAA).
Overview
Directors of Australian companies have a legal responsibility to ensure that their company meets its employee obligations through the
- pay as you go (PAYG) withholding and
- Superannuation guarantee charge (SGC) systems.
The director of a company that fails to meet a PAYG withholding or SGC liability by the due date automatically becomes personally liable for a penalty equal to the unpaid amount.
What are Director Penalty Notices (DPNs) ?
When a PAYG withholding or SGC liability remains outstanding, the ATO may issue a director penalty notice (DPN). Even without issuing a notice, the ATO can collect the penalty by other means, such as withholding a tax refund.
The director penalty regime makes directors of companies that fail to comply with their obligations to pay the amounts under the PAYG withholding regime and the superannuation guarantee charge provisions to the ATO (or fail to pay estimates of those liabilities) personally liable for the amount that the company should have paid, through the imposition of a penalty.
The Commissioner of Taxation (the Commissioner) uses these provisions to pursue directors of companies that fail to meet these obligations.
Recovering Director Penalties
While a director penalty is automatically imposed, the Commissioner must follow a specific procedure before being entitled to commence proceedings to recover that debt. This is expressed in the note to 269-20(2) of the TAA 1953.
The notice is in the form of a DPN. This does not prevent the Commissioner from taking other action such as issuing garnishee notices etc.
What are Garnishee Notices?
Pursuant to s 260-5 TAA, the ATO has the power to issue a third party (ie a bank) who owes the company/director money requiring the party to pay it straight to the ATO. Any money garnisheed by the ATO cannot be recovered in liquidation as an unfair preference. The Notice can ask for a percentage of wages or may seek payment of a lump sum amount. For individuals, that may mean the ATO issues a garnishee notice to your client’s employer or contractor and for businesses, the notice may issue to your client’s financial institution or trade debtor.
How To Avoid Personal Liability For the unpaid PAYG Tax
The ‘Directors Penalty Notice’ provides four options to avoid personal liability for the company’s unpaid PAYG Tax. Remission of the penalty will occur if the director(s) instigate one of four options which are detailed within the ‘Penalty Notice’ within 14 days. These four options are: – The company’s liability has been paid. – An agreement under Section 222ALA of the ITAA to pay the liability has been put in place. – The company is being wound up. – The company is under Administration within the meaning of the Corporations Act, 2001. The director(s) should seek advice on each available option to ensure that they avoid personal liability.
Reporting is important
Directors cannot discharge their DPN by placing their company into administration or liquidation when PAYG or SGC remains unpaid and unreported three months after the due date.
Stated another way, no personal liability if company reports debt on time. Despite recent changes, where the company has reported the liability within 3 months of it becoming due, then the director will still be able to absolve their personal liability by placing the company into administration or liquidation within 21 days of receiving the DPN.
What Should Directors Do?
To avoid the long arm of the ATO directors should:
- Report on time (BAS and Superannuation Guarantee Charge statements)
- Ensure ASIC details and records are up-to-date, as DPN’s will be validly served if they are sent to the director’s address set out in the ASIC register;
- Be proactive and timely in obtaining advice;
- Remain informed about your PAYG and SG payment obligations.
- Ensure that ‘contractors’ are correctly classified and that they are not deemed employees;