The ATO Director Penalty Regime

Tax Insights

The ‘corporate veil’ separates the rights, obligations and liabilities of a company’s Shareholders / Directors from those of the company itself.

This is important when a company has outstanding liabilities as this veil ordinarily allows these stakeholders to avoid personal accountability for the company’s debts.The Director Penalty Regime can make company Directors personally liable for a number of tax liabilities.

However, under the Australian Taxation Offices (“ATO”) Director Penalty Regime (“DPR”), the Commissioner of Taxation is empowered to make Directors of a company personally liable for specific tax-related liabilities of companies they represent.

Liabilities subject to the Director Penalty Regime

The Director Penalty Regime can make company Directors personally liable for the following tax liabilities:

  • Pay as You Go Withholding Tax (“PAYGW”);
  • Superannuation Guarantee Charge (“SGC”);
  • Goods and Services Tax (“GST”);
  • Luxury Car Tax (“LCT”); and
  • Wine Equalisation Tax (“WET”).

Prior to 1 April 2020, the Director Penalty Regime only covered PAYGW and SGC obligations, however, the regime was expanded through the Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill 2019.

How the Director Penalty Regime operates

Where a company has a debt outstanding in respect of any of the above tax liabilities, the ATO can issue the Directors of the company a Director Penalty Notice (“DPN”) in order to recover the company’s debt from the Directors personally.

Whether or not a DPN is issued is dependent on a variety of company specific factors including:

  • Historical non-compliance with reporting;
  • Significant unpaid ATO debt;
  • Suspicion of phoenix activity.

It is important to note that the liabilities are not required to be physically outstanding on the company’s ATO accounts. Should a company also fail to report and pay these liabilities, the Commissioner is able to include an estimate of any liability outstanding and include this in a Director Penalty Notice. How does the Director Penalty Regime operate?

Failure to report liabilities through a Business Activity Statement (“BAS”), Instalment Activity Statement (“IAS”) or Superannuation Guarantee Charge (“SGC”) statement within three months of their original due date can also cause a DPN to become a “lockdown” DPN.

Ordinarily, once a DPN has been issued a Director will have 21 days to either:

  • Pay the company’s debts as stated in the DPN; or
  • Appoint an administrator; or
  • Begin winding up / liquidating the company.

Under a general DPN, should the company be put into voluntary administration or winding up commences, the ATO will generally remit the Director’s personal liabilities under the DPN.

If the 21 days elapse, without the debt being paid or the company being placed into administration or liquidation, the ATO is authorised to commence legal proceedings against the Director to recover the penalty, and also has the ability to collect the penalty by other means, including the withholding of a personal income tax refund, or the issuing of a garnishee notice.

However, when the ATO issues a “lockdown” DPN in respect of liabilities the company has failed to report within three months of their original due date, the legislation does not allow for the penalty to be remitted, meaning a Director will remain personally liable for the “lockdown” DPN liability even when an administrator or liquidator is appointed within the 21 days.

Director defences

There are several defences available to a Director in respect of the issuance of a DPN including:

  • Inability to comply with the Director’s obligations due to illness or other “acceptable reasons”;There are several defences available to a Director in respect of a Director Penalty Notice as part of the Director Penalty Regime.
  • The Director having taken all reasonable steps to comply with the obligation;
  • There were no reasonable steps the Director could have taken to ensure compliance with the obligation;
  • The penalty was due to the company adopting a Reasonably Arguable Position (“RAP”), and it took reasonable care in applying the GST law.

Whilst a defence may be available for a Director in theory, should the circumstances or actions surrounding the defence not be evidenced via contemporaneous documentation then reliance on the defence may not be legally accepted. This is especially critical should the company take an alternative view on a GST issue and a RAP is not sought. The courts have also held that these defences must be proved for the entire period that the Director was under the obligation.

Practically, it is very difficult to establish a defence that will be accepted by the ATO, and should the matter end up in Court it can become a costly exercise.

Other considerations

Even if you are a newly appointed Director to a company, you can be held personally liable for historical tax liabilities if they remain unpaid and unreported within three months or more after the date of your appointment.Other considerations of the Director Penalty Regime.

In addition, Directors appointed after the payment due date of a liability have 30 days from the date of their appointment to avoid personal liability for the penalty. The Director will be required to take any action in respect the debt, including arranging for payment of the debt or entering the company into administration/liquidation.

As noted above, timing becomes crucial after a DPN has been issued, and it is therefore important that all Directors update their personal details with the Australian Securities and Investment Commission (“ASIC”) to ensure that should a DPN be issued, they receive it and can take appropriate action as soon as possible.

RSM recommendations

Directors must pay particularly close attention to their company’s tax reporting and payment obligations to ensure they are not blindsided by the receipt of a DPN.

For larger companies, in particular where a Director does not have director oversight of the company’s tax compliance obligations; it is especially important for the Director to make reasonable enquires to the tax team throughout the year to provide comfort, or to implement a formal Tax Governance policy requiring reporting of taxation obligations and liabilities to the Board on a regular basis.

A company’s non-compliance with their tax obligations can lead to devastating personal consequences for a Director, and all relevant personnel of a company should, therefore, be made aware of the regime.

Should you require further information in relation to your obligations as a company Director, please reach out to your RSM Tax or Restructuring and Recovery specialist to seek professional advice.

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