Director Penalty Notices

Company directors may be personally liable for outstanding tax due by the company to the ATO. All company directors and their professional advisers should be aware of directors personal liabilities and what actions should be taken when a Director Penalty Notice is issued by the Commissioner of Taxation.

Directors can be personally liable for company debts

Directors of a company may be made personally liable for unremitted amounts due by the company to the ATO. Division 269 of Schedule 1 of the Taxation Administration Act 1953 (Cth) governs this potential liability.

The object of Division 269 is to ensure that if a company cannot meet its obligations to pay tax due to the ATO, it moves into voluntary administration or into liquidation promptly.

And if a company does not remit tax payments to the ATO by the due dates, the directors of the company each become personally liable to pay to the Commissioner, by way of a penalty, an amount equal to the unpaid amounts of the company’s liability for unpaid tax.

To do this, the Commissioner must issue a Director Penalty Notice (“DPN”). A DPN will require the directors of a company to take one of the following actions, within 21 days:

a. comply with its obligations to remit amounts deducted or pay estimated liabilities; or
b. go into voluntary administration; or
c. go into voluntary liquidation.

From 1 July 2010, the timeframe for compliance with a DPN was extended from 14 to 21 days. It is important to note that a DPN is taken to be given at the time the Commissioner posts the notice to or leaves it at the registered office of the company. It is therefore vital that directors act swiftly to comply with the notice.

If one of the above actions is taken within the 21 day time period, the penalty and the director’s personal liability are discharged. If none of the above actions are taken within 21 days, the Commissioner can commence proceedings against the directors personally to recover the amount of the penalty.

The DPN must:

1. set out what the Commissioner thinks is the unpaid amount of the company’s liability under its obligation;
2. state that the directors are liable to pay to the Commissioner, by way of penalty, an amount equal to that unpaid amount because of an obligation the directors have under Div 269 of Sch 1; and
3. explain the main circumstances in which the penalty will be discharged.

The recipient of a DPN does not have to be a current director - if a person was a director for at least some of the period before the date the company became liable to pay the tax, that person may be personally liable for the amount of the company’s liability.

Changes - 1 July 2010

Prior to the 1 July 2010 changes, a director could enter into an instalment arrangement with the Commissioner for repayment of the liability after receipt of a DPN, which effectively discharged the director’s personal liability. This is no longer the case.

Since 1 July 2010, under Div 269, a director cannot automatically avoid personal liability just by entering into an acceptable repayment plan. However, the Commissioner is prohibited from commencing proceedings to recover a penalty from the director if the company has entered into a repayment plan, but if the company does not comply with the repayment plan, the original penalty can be collected from the directors under the original obligation.

Director’s rights of indemnity and contribution

Directors who pay penalties have a right of indemnity as against the company itself, together with the right to seek contributions from other directors as if they were jointly and severally liable.

Defences to liability for penalty

There are two defences available to directors in respect of proceedings to recover a penalty:

1. That because of illness or for some other good reason, it would have been unreasonable to expect the director to take part in the management of the company; or

2. The director took all reasonable steps to ensure that the directors complied with their relevant obligations under paragraph 269-15 (directors must cause the company to comply with its obligations), or there were no such reasonable steps that could have been taken.

Prevention is obviously better than cure and all directors need to be aware of their company’s ability to pay creditors at all times. Being forced into administration as a consequence of a DPN is not desirable. In order to maximise the restructuring options available to a company, directors should action any unremitted tax well before a DPN is issued and/or seek advice early.

If your company is experiencing serious cash flow problems or worse, don’t sit still and risk your personal assets, seek advice.

In addition to providing insolvency advice we regularly work with experienced accountants and insolvency practitioners, providing assistance and advice on all fronts to help companies in this area. If you require any further information on insolvency matters – personal or corporate – please contact Walter MacCallum or Amy Brice.