As COVID-19 continues to cripple our economy and the Federal Government deficit at its highest since World War II, it’s inevitable that we will see a significant increase in revenue collection activity by the Australian Taxation Office (ATO
Under the director penalty regime (DPR) company directors are now liable for all of a company's PAYG liability, GST, luxury car tax and wine equalisation tax liabilities and SGC liabilities - the expansion of the director penalty regime (DPR
) now incorporates GST (from 1 April 2020). This will certainly make it easier for the ATO collect additional revenue by pursuing directors whose companies fail to meet their taxation obligations.
The DPR allows the ATO to make directors of a company personally liable for tax liabilities of their company through the issue of a Director Penalty Notice (DPN
Previously, the regime was limited to PAYG withholding and superannuation guarantee charge liabilities, but it has now been extended to include GST, wine equalisation tax and luxury car tax.
What tax obligations do directors have?
A fundamental role of a company director is to ensure the company complies with "all" of its financial obligations. One of the most important being the lodgement of returns and payment of tax (both on behalf of the company itself and to collect and account for employee taxes and superannuation).
The ATO has invested significant funds into technology and routinely ‘benchmarks’ a company’s tax performance against its industry peers. Company directors need to be astutely aware of their company’s tax obligations and this should be a key feature of all board papers.
It’s not enough for a company director to rely on expert advice, the advice of other directors or that of the CFO. Directors need to monitor the financial performance of their company, stay up to date and routinely monitor its taxation obligations.
Obligations of new directors
If you are about to become the director of a company, it’s imperative to check for any unpaid or unreported PAYG withholding, GST or SGC liabilities. As a new director, you have 30 days, from the date of your appointment, before you become liable for director penalties equal to:
- all of the company's unpaid PAYG withholding liabilities;
- all unpaid net GST, luxury car tax and wine equalisation tax liabilities; and
- all unpaid SGC liabilities.
However, as a new director, you will not be liable for director penalties for amounts due before your appointment if, within 30 days 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; and
- begins to be wound up (within the meaning of the Corporations Act 2001).
Given the risk exposure directors have (noting the limited defences available to directors are increasingly being rejected by courts), directors should take steps to ensure that the taxation affairs of their companies are in order and identify any potential exposure.
What do you if you receive a DPN?
If you receive a DPN, you should obtain immediate advice to understand the options available to you. Whilst there are defences available to avoid the liability, they are limited. There are also strict time limits that apply and failure to act within these could be disastrous.
Furthermore, directors must be careful not to expose themselves to a breach of director’s duties when articulating their defence, as a breach of a taxation obligationcan give rise to a corresponding breach of a director’s duty of care and diligence.
You remain liable for director penalties equal to the unpaid PAYG withholding, net GST and SGC liabilities of the company that were due before the date of your resignation; fell due after your resignation when a) for PAYG withholding and net GST (inclusive of LCT and WET), the first withholding event in the reporting period occurred before your resignation; b) for SGC liabilities, the date the charge became payable.
ATO case study
On 2 June 2020, Gabrielle became a director of the 123 Pty Ltd (the company). To avoid becoming personally liable for a penalty amount, Gabrielle has 30 days starting on the day of her appointment to do one of the three required actions:
cause the company to pay the debt
appoint an administrator under section 436A, 436B or 436C of the Corporations Act 2001
have a liquidator appointed to wind up the company.
On 13 June 2020, Gabrielle resigns from being a director of the company.
On 1 July 2020, the company did not pay the amounts, nor did the company enter administration or liquidation. Although Gabrielle resigned from being a director of the company within 30 days of her appointment, she did not cause the company to do one of the three required actions within those 30 days. As a result, she incurs a director penalty at the end of that 30th day.
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.