More often than not, directors, particularly those operating in Small to Medium Enterprises (“SMEs”), are not aware that they could be personally liable for their company’s tax debts in certain circumstances. This lack of awareness unnecessarily exposes assets outside of their company that are owned by the director personally, including the family home.
Historically the Director Penalty Notice (“DPN”) legislation was first introduced in 1993 when the Australian Taxation Office (“ATO”) gave up its statutory priority for the then Group Tax, now Pay-As-You-Go (“PAYG”).
When DPNs were introduced the Superannuation Guarantee Charge (“SGC”) was only 3%. It is now 9.5%. The view is that an employer should not use employee funds as working capital for the company. This is becoming more evident in the recovering actions the ATO is commencing.
DPNs have always imposed a personal liability against directors for unpaid PAYG. However, such exposure could not commence being recovered (or enforced) against the director unless the ATO had issued a DPN to them. Such DPNs gave directors 21 days to effectively avoid personal liability if either:
- They appointed a Voluntary Administrator; or
- They appointed a Voluntary Liquidator; or
- Otherwise arranged for payment of the liability.
The ATO has been and continues to be concerned about the level of phoenix activity, as well as employers not complying with their SGC obligations. As a result, on 29 June 2012 changes were made to the DPN legislation. Some changes are still not well understood by professionals and directors, including the fact that certain changes operate retrospectively.
The ATO can issue a DPN in respect of either unpaid PAYG or SGC (for SGC amounts after 30 June 2012). The ATO must still issue a DPN and wait until the expiration of 21 days from the issue date in order to be able to commence proceedings. Personal liability will not occur if, within 21 days of the issue date (not the date of receipt), the directors comply with any of the above conditions.
However, where 3 months or more have elapsed since the due date and the PAYG or SGC liability remains both unreported and unpaid, then there is no relief from personal liability by subsequently placing the company into Voluntary Administration or Voluntary Liquidation. This is known as the “lockdown rule” and has been put in place to ensure that directors are at least reporting their obligations so the ATO knows how the debt is accumulating. It is now more critical than ever that company’s report their obligations on time, even if they may not be in a position to necessarily pay the liability.
Importantly new directors being appointed to an SME should be aware that they can become liable under a DPN for unpaid liabilities which were due prior to their date of appointment. So, make sure you understand what you are getting yourself into!!!
This article is for general information only and is not intended as legal advice. If you need specific help, please contact our office.
