Can a Director be personally liable for ATO Debts?

We have written in past editions of the S & W Insight of the risks directors run in becoming personally liable for ATO debts. This is an issue that needs to be continually reviewed as the protection that a company structure provides the director, can be easily lost in certain circumstances.

It is important to remember the situations where a director can be held personally liable for ATO debts. Below we outline a couple of situations that you should be aware of.

The first situation is where you receive a Directors Penalty Notice

  • The law around this area is designed to ensure that directors ensure the company complies with certain taxation and superannuation obligations. The ATO may issue a Director Penalty Notice (DPN) equal to the company’s unpaid superannuation and PAYG withholding amounts. If the director does not do one of a number of things within 21 days he will then be held personally liable for the outstanding debts. To avoid being made personally liable for the debt the director must ensure that, within 21 days one of the following happens:
    • Pay the debt
    • Make an arrangement to pay the debt. This involves negotiating with the ATO to agree to pay the debt off over time.
    • Place the company into voluntary administration
    • Place the company into liquidation

In the event the company has not reported the unpaid amounts within 3 months, the only way to discharge the penalty is to pay the debt in full.

It is more likely that a payment arrangement would be accepted before the DPN is issued.

The second situation is where there are PAYGW and Superannuation outstanding for more than 3 months and the returns for these periods have not been lodged

  • Since June 2012 the ATO has been given greater power to impose PAYG withholding tax and Superannuation Guarantee Contribution (SGC – currently 9.5%) on the directors and make them personally liable for the unpaid amounts. This rule is applicable to both new and old directors. Where a company has failed to report within 3 months of the due date the PAYG withholding tax or the outstanding SGC debts, the Directors are automatically made personally liable for the debt. This is the case even if a DPN has not been issued. As a Director you should always ensure that the returns are lodged even if you cannot pay the tax. This way the Director avoids personal liability for the debts unless a DPN is issued and it is not dealt with as discussed above within 21 days. 

A couple of other issues you should also be aware of

  • Directors cannot absolve themselves of potential personal liability simply by resigning as a director.
  • Former directors may be liable for penalties which were due up to the date of their resignation.
  • Former directors may also be liable for penalties after their resignation, where the first withholding event in the reporting period occurred prior to their resignation.
  • New Directors may be liable for penalties following their appointment and also for debts prior to their appointment. New directors have 30 days from the date of their appointment before they become liable for unpaid superannuation and/or PAYG withholding.
  • Directors can avoid liability for penalties if they were ill or were not involved in the management of the company:

Please review the above and if you have any queries in relation to the above don’t hesitate to contact us to discuss.