Company directors can be personally liable for a company’s debts and liabilities.
If your company doesn’t meet its PAYG withholding, GST or super guarantee charge (SGC) obligations, the ATO may recover these amounts from you personally as a director of the company.
The ATO outlines key considerations for directors or former directors of companies to avoid or mitigate personal liabilities, as part of its director penalty regime.
Before you become a director
If you become a director and the company has outstanding PAYG withholding, net GST or SGC obligations, within 30 days you will become personally liable for a penalty equal to these amounts (“director penalties”). This applies even if you resign within the 30 day period.
If you are about to become a director of a company, you should check whether there are any unpaid liabilities.
If there are unpaid liabilities and you still decide to take the position, there are ways to ensure that you are not liable to director penalties for amounts due before your appointment. This can be satisfied if within 30 days starting on the date of your appointment, the company does one of the following:
- Pays their PAYG withholding, net GST and/or SGC debt in full.
- Appoints an administrator under section 436A, 436B or 436C of the Corporations Act 2001.
- Begins to be wound up (within the meaning of the Corporations Act).
Once you are a director
As director, you will become personally liable for any unpaid liabilities for reporting periods that started while you were a director.
No longer a director?
If you are no longer a director, you remain liable for director penalties that:
- Were due before the date of your resignation.
- Fell due after your resignation when:
- for PAYG withholding and net GST, the first withholding event in the reporting period occurred before your resignation.
- for SGC liabilities, you resigned on or after the date the charge became payable.
How does the ATO recover director penalties?
Director penalty notice
The ATO will first issue you a Director Penalty Notice (DPN) outlining the unpaid amounts and recovery options available, which include:
- Garnishee notices.
- Offsetting any of your tax credits against the director penalties.
- Initiating legal recovery proceedings against you to recover the director penalty.
Remitting the penalty
The timing of when liabilities are notified to the ATO will determine what actions are available to remit director penalties.
If the unpaid amount of:
- PAYG withholding or net GST is reported within three months of the due date (or, in the case of new directors, within three months of the date of their appointment), and
- SGC obligation is reported by the due date for the SGC statement,
The penalty can be remitted by one of the following in accordance with the Corporations Act 2001:
- Paying the debt.
- Appointing an administrator.
- Beginning to wind the company up.
If unpaid liabilities are reported outside of the guidelines provided above, the only way to remit the penalty is to pay the debt.
Remission can be achieved any time prior to a DPN being given. Once issued, a director only has 21 days from the date of the notice to remit the director penalties stated on that specific DPN.
If the company fails to report PAYG withholding, net GST or SG obligations by the due date, the ATO may make a reasonable estimate of the unpaid and overdue amount of the liability.
The director penalty provisions apply to these estimated liabilities. The estimate is due and payable by the company on the day the ATO gives the company the estimate notice.
Are there defences to a director penalty notice?
The director penalty regime provides a number of statutory defences. You will have a defence and not be liable for a director penalty if:
- You did not take part (and it would have been unreasonable to expect you to take part) in the management of the company during the relevant period because of illness or another acceptable reason.
- You took all reasonable steps to ensure the company paid the amount outstanding, an administrator was appointed, or that the directors began winding up the company.
- In the case of an unpaid SGC liability – the company treated the Superannuation Guarantee (Administration) Act 1992 as applying in a way that could be reasonably argued, was in accordance with the law, and took reasonable care in applying that Act.
Company directors need to take care in ensuring that the company meets its PAYG withholding, GST and super obligations. Otherwise they may become personally liable under the ATO’s director penalty regime.
Before assuming a position of company director, a critical first step is to check whether there are any unpaid liabilities. Both current and former directors can be liable, so simply resigning will not necessarily absolve you of liabilities.