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The PAYG Penalty: Costly Implications for Directors

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By Krisha Reddy, Law Clerk and Alicia Hill, Principal, MST Lawyers

The PAYG Penalty can have very costly personal implications for directors of companies that become insolvent. This was demonstrated in the recent decision of Justice McKerracher in Deputy Commissioner of Taxation v Pedley (No 2) [2018] 2015 where the liable director received a judgment of $159,768 against him.


The matter concerned Pay As You Go (PAYG) amounts that were outstanding by Stellar Corporate Solutions Pty Ltd (Stellar) to the ATO for the period from August 2013 to November 2013 totalling $203,798. In January 2014, the Commissioner of the ATO issued a Director Penalty Notice (DPN) in respect of these outstanding amounts against Mr Pedley, who was a director of Stellar during the relevant period. The effect of the DPN was that there was a parallel liability for the $203,798 owed both by Stellar and by Mr Pedley personally.

While Mr Pedley had a parallel liability for the $203,798, Stellar owed additional debts to the ATO. Between April and August 2014, $555,764 was paid by Stellar to the ATO. Payments were allocated in accordance with ATO Policy, to the oldest debts first. This meant that only $44,030 was applied against the PAYG debt.

When proceedings were eventually brought, Mr Pedley argued that both the method of allocating payments and the failure of the ATO to proactively contact Stellar or himself to ask how the payment should be allocated was unreasonable.

Relevant Law

Division 269 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (TAA) imposes a duty on the directors of companies to meet their PAYG obligations. A failure to comply can result in the ATO pursuing directors personally.

When discharging a liability under Division 269, a company must either:

  1. enter into an agreement with the Commissioner stating that certain instalments made will go towards discharging specific liabilities owed; or
  2. reduce its debt through the application of ATO Policy by ATO staff which provides guidance to staff on how to allocate instalments made.

The relevant ATO Policy provides that where no direction is received by a company, all payments will be allocated to the oldest debts first. Further, even where a party makes instructions, the Commissioner is not required to follow these instructions (section 8AAZLE TAA).


Justice McKerracher found against Mr Pedley.

Mr Pedley had the opportunity to request that the ATO allocate the payments against the PAYG debt to reduce his own personal liability. However, he had failed to take this opportunity, and ATO staff had merely complied with the existing ATO Policy. Even if Mr Pedley had made such a request, there would be no requirement for the Commissioner to follow his instructions, as stated clearly in the legislation.

The decision of the Federal Court should serve as a valuable reminder to directors. Division 269 imposes a duty on directors to ensure that their company meets PAYG obligations to the ATO because a failure to do so can see them being personally liable for those PAYG obligations. It also shows the importance of obtaining specialist advice. If Mr Pedley had known that he could have asked for payments to be specifically applied against the PAYG debt, he may not have received the judgment requiring him to pay $159,769.

If you have any concerns about the issues raised in this article or similar matters, please feel free to email Alicia Hill or call +61 3 8540 0200.