Director Penalty Notice – Important Considerations
By John Sier, Principal, MST Lawyers
It has been a year since our last report on the introduction of the strengthened laws with respect to Director Penalty Notices. During this time there has been a significant increase in the number of Director Penalty Notices being issued by Australian Tax Office (ATO) in relation to unpaid PAYG withholding and Superannuation Guarantee obligations.
The following are some of the many important things that directors should consider in relation to Director Penalty Notices:
As noted in our last report, under the old law, a director could avoid personal liability for unpaid PAYG by placing the company into liquidation or voluntary administration within 21 days of receiving a Director Penalty Notice.
Under the current law, a director’s ability to avoid liability for unpaid PAYG and Superannuation Guarantee payments is significantly restricted. Where PAYG and Superannuation remain unreported and unpaid 3 months after the due date for payment, directors can no longer avoid being personally liable for the debts by placing the company into administration or liquidation.
However, by notifying the ATO of the outstanding debt within 3 months of the debt being due, directors can still use the usual method of placing the company into administration or liquidation to avoid being personally liability.
This 3 month threshold is of critical importance.
The outstanding debt does not necessarily need to be paid within 3 months of the due date. Even if the company lacks the ability to pay, directors should ensure the relevant statements have been lodged on time given that the act of reporting the debt is what affords directors the opportunity to use administration or liquidation as a method of avoiding personal liability.
Where the company fails to report its liability within 3 months of it becoming due, the only way that directors are now able to avoid personal liability for unreported debt is by causing the company to pay the debt to the ATO (unless the director can otherwise establish a relevant defence).
From a director’s perspective, the enhanced possibility of directors becoming personally liable for unpaid PAYG and Superannuation Guarantee obligations should no doubt be an important consideration in determining which creditor of the company gets paid first, remembering that directors can avoid personal liability by simply causing the company to pay the outstanding amounts.
However, it is important to note that, in instances where the company is on the brink of becoming insolvent, simply paying the ATO out of the company’s limited funds to avoid the directors becoming personally liable is not without its own risks.
Under section 588FE of the Corporations Act a transaction may be voidable if it amounts to an unfair preference. A transaction may be an unfair preference given by the company to the ATO (or any other creditor) if the transaction results in the ATO receiving more than it would have received if it were to prove for the debt in the winding up of the company. By using all the company’s funds to pay only the ATO debt, and thereby leaving no money to pay the other creditors, the transaction is at risk of being declared an unfair preference and voidable if the company goes into liquidation. On application of the liquidator, the Court can order that the ATO pay back to the company the money received in the unfair preference transaction.
If such event arises, directors are personally liable under section 588FGA of the Corporations Act to indemnify the Commissioner of Taxation for any loss or damage that result from the Court declaring the transaction void. This is in essence the same personal liability directors are trying to avoid by paying the ATO out of the company funds in the first place.
Due diligence for new directors
New directors can become personally liable for outstanding unreported PAYG and Superannuation debts that are incurred by the company before their appointment. If the debts remain unreported and unpaid, liability of the new directors will commence 30 days after their appointment.
Therefore, any person considering becoming a director of an existing company should conduct significant due diligence before accepting such appointment in order to determine whether there are any outstanding PAYG or Superannuation Guarantee debts for which they may become liable.
The ability for directors to avoid liability once a Director Penalty Notice has been issued is not as easy as it once was. The old method of placing the company into liquidation or voluntary administration to avoid personal liability of the debt is no longer available where BAS and Superannuation Guarantee Charge Statements are more than 3 months overdue. Additionally, in instances where the company is likely to go into liquidation, simply paying the debt out of the company funds once a Directors Penalty Notice is issued may not be without consequences for directors.
The safest course of action is being proactive rather than reactive. Directors should ensure that BAS and Superannuation Guarantee Charge Statements are lodged on time, even if the company lacks the ability to pay, as the act of providing notice of the debt within three months of the due date is what creates the opportunity for directors to avoid personal liability by placing the company into voluntary administration or liquidation. Directors should not rely on others to attend to these obligations in the absence of controls to inform them when these relevant obligations are overdue.