Director’s Personal Liability for Company Tax Debts

Under current tax law, directors of companies can be held personally liable for unpaid PAYG Withholding (PAYG(W)) liabilities. PAYG(W) is tax withheld from an employee's gross salary.

The Income Tax Assessment Act 1936 provides a mechanism under which the Commissioner of Taxation can make an assessment of unpaid PAYG(W) and then issue a Director’s Penalty Notice (DPN).

The receipt of a DPN places an obligation on a director of a company, before the due date for payment of an unpaid PAYG(W) amount, to cause the company to do one of the four following things:

to pay the outstanding tax debt in full;
to enter into a payment arrangement with the Australian Taxation Office (ATO);
to appoint a Voluntary Administrator; or
to appoint a Liquidator to wind up the company.

If the company does none of the above, the director is liable to pay a penalty equal to the unpaid PAYG(W) amount.

Directors have been able to avoid personal liability for PAYG(W) liabilities by placing the company into voluntary administration or liquidating the company. In many cases the old company is deliberately liquidated and a new company (a phoenix company) controlled by the same individuals is set up with a similar name to carry on the same or similar trading activities.

Amending legislation currently before Parliament proposes to counter such fraudulent phoenix activities by company directors.

The Government intends to extend the DPN regime to make company directors personally liable for the company’s failure to pay superannuation guarantee contributions for employees. This will be in addition to a director’s current liability for PAYG(W) amounts.

The ATO will be allowed to immediately pursue directors where the company’s unpaid PAYG(W) amount and superannuation guarantee liability remains unreported and unpaid for three months after the due date for lodgement of a return.

The ATO will also be provided with the discretion to prevent directors and their associates from obtaining PAYG withholding credits where the company has an outstanding PAYG(W) liability.

Once the amending legislation becomes law, directors of companies will need to ensure that the company gets it Business Activity Statement (BAS) lodgements up to date and always lodges BAS’s within three months of the due date. BAS’s should be lodged even if the company can’t pay the PAYG withholding amounts as this will avoid a starting position for a director’s personal liability.

Failure to lodge within the three month deadline will mean that directors will immediately become personally liable for PAYG(W) amounts.

Similarly, failure to meet superannuation obligations and failure to complete a quarterly superannuation guarantee charge (SGC) statement and pay the SGC will give rise to penalties. In addition, where the lodgement of the SGC statement is more than three months late, the ATO will be immediately allowed to pursue the directors and their associates for the outstanding superannuation guarantee contributions.

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