Usually directors are not liable for a company’s debts. The company is a separate legal entity and acts in its own right. But in certain cases the law allows the ATO to cut through this corporate veil. And this happens through a director penalty notice.
Director Penalty Notice
A director penalty notice (DPN) is the ATO’s only way to cut through the corporate veil. And get to the individuals sitting behind that veil – the directors.
Many of the original divisions in the TAA have been repealed. The original TAA is like a half-gutted frame. And attached to that frame is Schedule 1. Schedule 1 covers the collection and recovery of income tax and other liabilities.
A director penalty notice lives in Division 269 of Schedule 1 to the Tax Administration Act (TAA). To leave no doubt what this division is about its title declares loud and clear:
Penalties for directors of non-complying companies.
To issue a director penalty notice everything sits in that division. It pierces through the corporate veil.
The purpose of Div 269 is to ensure that a company either meets its obligations in relation to PAYGW and superannuation, or promptly appoints a voluntary administrator or liquidator.
Meaning if you are in such a bad way that you even have to steal from your employees, then it is time to call it a day.
Div 269 holds directors personally liable for a company’s PAYG liabilities and superannuation guarantee charge (SGC) obligations.
s269-5: The object of this division is to ensure that a company either (a) meets its obligations …(i)…to pay withheld amounts to the Commissioner and (ii) …estimates of PAYG withholding…and superannuation guarantee charge and (iii)…pay superannuation guarantee charge or (2) goes promptly into voluntary administration…or into liquidation.
So FBT, GST, corporate income tax might all be forgiven. But if a director takes an employee’s superannuation or tax credit, the ATO turns ferocious and aims at the individuals behind the corporate veil – its directors.
The amount of the director penalty notice is the amount of unpaid liabilities for PAYGW or SGC. For example when the company withheld PAYG but then didn’t pass it on to the ATO.
The ATO can’t act without warning though. The ATO needs to give a director three weeks to right things.
s269-25 (1): The Commissioner must not commence proceedings to recover from you a penalty payable…until the end of 21 days after the Commissioner gives you a written notice…
So it all starts with a notice. In this notice the ATO must tell the director what the problem is.
s269-25 (2): The notice must (a) set out what the Commissioner thinks is the unpaid amount fo the company’s liabilities…and (b) state that you are liable to pay…and (c) explain the main circumstances in which the penalty will be remitted.
Nothing else happens until 3 weeks have passed since this notice. The notice is served to the company’s registered company address registered with ASIC.
If the directors act within these 21 days and pay up or place the company under administration or wound it up, then all is forgiven. And that’s where the problem is. That’s where phoenixing comes in. Directors don’t pay but place the company under administration, keep the money and walk away…and do it all again.
Not every director is part of a phoenixing scheme though. Most directors of struggling companies are trying to do the right thing – trying to keep the company afloat, the business alive, the family home away from the banks and the ATO at bay. So the Commissioner can give a director a payment arrangement.
s255-15: The Commissioner may…permit you to pay an amount…by instalments under an arrangement between you and the Commissioner.
But this doesn’t mean the clock stops ticking. The liability still incurs interest.
s255-15 (2): The arrangement does not vary the time at which the amount is due and payable.
But it means that the Commissioner must not commence proceedings to recover a director penalty if a payment arrangement is in place.
s269-15 (3): The Commissioner must not commence…proceedings…to recover a penalty of a director….if an arrangement..is in force under section 255-15.
But it does not prevent the Commissioner from issuing a DPN. Nor does it release a director from the DPN if the director doesn’t meet the payment arrangement terms.
Late BAS and SGC returns
An easy way to avoid a DPN would be to just keep silent. How is the ATO to know that a company withheld PAYG from wages, if W1 on the BAS comes back as zero or no BAS or SGC gets lodged in the first place?
If a director does that, then administration or liquidation is no longer a way out.
Where a company fails to notify the Commissioner of its PAYG withholding or SGC obligations within three months of the due date, Section 269-30(2) Schedule 1 of the TAA prevents remittance of a DPN penalty in cases where the company enters administration or liquidation.
So it is really important to lodge BAS and SGC on time. Even if there is no money to pay these.
Limited defences to a DPN are available under s 269-35 of Schedule 1 to the TAA.
s269-35 (1): You are not liable to a penalty..if because of illness or for some other good reason, it would have been unreasonable to expect you to take part..in the management of the company.
(2): You are not liable to a penalty…if (a) you took all reasonable steps…or (b) there were no reasonable steps you could have taken…
(3): In determining what are reasonable steps…have regard to (a) when and for how long you were a director and took part in the management of the company and (b) all other relevant circumstances.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 18 January 2019