There are many responsibilities associated with being a company director. Sometimes, a director may receive a director penalty notice (DPN) from the Australian Taxation Office (ATO) and is made personally liable for the company’s outstanding PAYG withholding and superannuation guarantee charge (SGC) payments.
A. How Does It Work?
As a company director, you are responsible to make sure the company meets its PAYG withholding and super guarantee payment obligations. When these payment obligations are not met by the due date, the directors of the company may be made personally liable, unless the director can prove that there are legitimate reasons that prevent them from managing the company at the time, or the director has taken all reasonable steps to ensure the company fulfil its tax obligations.
The ATO has the discretion whether or not to issue a DPN, and it usually comes down to the company’s tax payment record in the past.
When there are multiple directors, the ATO can issue notice to any one or all of the directors. The notice will be sent to the director’s personal address registered with ASIC, so it is important to keep the address up to date.
If super contributions and PAYG withholdings have been reported within three months of their due dates but payments remain outstanding, the ATO will issue a DPN to a director giving them 21 days to resolve the matter, including:
Ensure the payment is made in full
Place the company into voluntary administration
Wind up the company
If however, these amounts are unpaid and unreported within three months of the due dates, and the ATO decides to issue a DPN, the director will be made personally liable automatically without having the above options. In the latter situation, the ATO can use information on hand to estimate the amount of liabilities.
If the payments are not made by the director after receiving the DPN, the ATO has a few options to recover the debts including issuing Garnishee Notice to obtain funds from the director’s personal bank accounts, and using the director’s personal tax credit to offset the liabilities.
B. When You Are Newly Appointed
Before you become a company director, it is good to check whether the company has any outstanding tax liabilities.
If a company does have outstanding PAYG withholding or SGC, you will not be made personally liable for these amounts if the matter is resolved within 30 days of your appointment.
Note that if the matter is not resolved and the outstanding amounts remain unpaid, you may be made personally liable even if you resign within 30 days.
C. If You Resign
Even if you resign, you may still receive a DPN when:
They fall due before your resignation,
They fall due after your resignation but:
For PAYG withholding, the first withholding event in the reporting period falls before your resignation
For SGC, the relevant quarter ends before your resignation
D. A Recent Case
In Pedley v Deputy Commissioner of Taxation, the company had made tax payments after a DPN was issued to one of the directors in relation to outstanding PAYG withholding. Once received, the payments were allocated by the ATO first to the oldest debts of the company. As a result, some PAYG withholding liabilities subject to the DPN remained outstanding, and the ATO subsequently commenced proceedings to recover the debts from the director.
The director appealed and argued that the payments were intended to pay off all the debts subject to the DPN, and therefore his payment liability as a director should be fully discharged. However the court dismissed the director’s appeal.
This case reminds us that when making a payment to the ATO, it is wrong to assume that the payment will be used to pay off any specific debt. If you want the payment to be allocated in a particular way, you need to bring it up with the ATO when negotiating a payment plan. Although not obligated to agree, the ATO may take your request into consideration.
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