Companies are often used as an asset protection tool in business. Directors are able to protect personal assets through the corporate veil where only assets of the company can be used to settle liabilities.
This has started to change as the Australian Taxation Office (ATO) now is able to apply Director Penalty Notices to initially receive the unpaid superannuation guarantee surcharge for employees and unpaid Pay As You Go Withholding.
Essentially you as the individual director can be liable for the company’s debt.
This has now been extended further to include GST, Luxury Car Tax and WET.
Through the legislation, the ATO can pursue any or all of the directors of the company. You may even be liable for an outstanding debt if you have become a director of the company, post the debt being created. The ATO also have the power to estimate a liability should relevant information not have been lodged.
The power extends to being able to issue a garnishee notice to a bank to take funds they hold for you personally or simply reducing your personal tax refund and applying it against the debts of the company.
A real-life scenario could be two friends who go into business through a company. They are both made directors and shareholders in equal amounts. Whilst both may work in the business one may also do all the bookkeeping and be responsible for the ATO lodgements. Due to cash-flow difficulties, the business may stop paying ATO liabilities. The ATO could issue a DPN to either director personally to recover the debts.
It should also be noted that if one of the directors had resigned whilst there were outstanding debts, the ATO has the power to issue the Director Penalty Notices to the now-resigned director to recover liabilities
Another change for directors of companies coming soon is the issue of a unique Director Identification Number. This number will be kept for life and shown against any directorships held. It is hoped that the unique number will help prevent fictitious director appointments to companies.
If you have questions regarding Director Penalty Notices get in contact with your local RSM team for more information.