Director Penalty Notices explained

Directors aren’t liable for company debts – right? The Director Penalty Notice regime may make director’s personally liable for unpaid tax debts

When setting up your company, one of the first benefits explained to you would have been ‘limited liability’ for you as a shareholder and director. As a company is an independent legal entity, liability is generally limited to the company’s assets. This is unlike other business structures like partnerships where liability may be joint and several.

What is the Director Penalty Notice regime?

In 1993 the Director Penalty Notice regime was introduced to assist in recovering certain tax liabilities of companies. It was initially focused on Pay-As-You-Go Withholding (‘PAYGw’) amounts – which are taxes withheld from wages paid to employees.

In 2012, the laws were further extended to include unpaid superannuation guarantee (‘SG’) amounts in the Director Penalty Notice regime. In addition, the regime was changed to ensure that directors could not discharge their director penalties by placing the company into administration or liquidation where PAYGw or SG amounts had not been reported or paid for 3 months after the due date.

New directors appointed to a company with existing debts and obligations were also made liable for director penalties where the company has failed to meets its obligations by the due date and 3 months after the director has been appointed.

From 1 April 2020, the regime was further extended to include unpaid Goods and Services Tax (‘GST’), Luxury Car Tax  (‘LCT’) and Wine Equalisation Tax (‘WET’) amounts within the director penalty notice regime.

How can the ATO recover director penalties?

Prior to taking recovery action, the ATO must issue a Director Penalty Notice to the applicable directors with the unpaid amounts and remission options stated on the letter. Failing to meet the Director Penalty Notice will lead to other forms of recovery actions against the director including garnishee notices, offsetting tax credits and/or initiating legal proceedings.

What are the types of Director Penalty Notices?

There are two types of notices that can be issued and which applies depends on the specific obligations the company has failed to meet.

1. Non-lockdown Director Penalty Notice

A ‘non-lockdown’ notice is issued where a Business Activity Statement (reporting PAYGw, GST, LCT, WET) or a Superannuation Guarantee Charge form have been lodged on time – but liabilities remain outstanding.

A non-lockdown notice gives directors the option to avoid personal liability if, within 21 days the company:

• pays the debt or makes a suitable arrangement to pay it;
• appoints a voluntary administrator; or
• places the company into liquidation.

2. Lockdown Director Penalty Notice

A ‘lockdown’ notice is issued where the director has failed to lodge outstanding Business Activity Statements within 3 months of the due date and has also failed to pay outstanding liabilities. This notice only allows the director to avoid personal liability where the company pays the outstanding debt within 21 days of the notice being issued. Importantly, placing a company into administration or liquidation will not remove personal liability from a director where a lockdown notice has been issued.

For outstanding SG amounts, a Director Penalty Notice can be issued immediately following the due date for SG (28 days after the end of a quarter).

How can Tax Controversy Partners help you?

If you a director of a company that is struggling to meet your taxation obligations, it is important that you seek professional advice to assist in arranging payment plans and open communication with the ATO. If you receive a Director Penalty Notice, it is vitally important that you urgently get competent legal advice on your obligations and any time-critical relevant defences that may apply.

At Tax Controversy Partners, our experienced lawyers can assist you in contacting the ATO on your behalf and arranging payment plans for outstanding debt and in dealing with Director Penalty Notices. Please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.