When considering the incorporation of a company one of the first, and most persuasive, things that you will likely hear is that it’s a separate legal entity and consequently offers protection to its directors from numerous liabilities. However beware the Australian Tax Office’s (ATO) Director Penalty Regime, which can swiftly put aside limited liability and hold director’s responsible for unpaid Pay As You Go (PAYG) Withholding and Superannuation Guarantee Charge (SGC).

The penalty element of the Director’s Penalty Regime is the value of the unpaid PAYG and/or SGC and to recover it the ATO will issue a director penalty notice (DPN), which allows a director 21 days to take action.

The uncompromising regime leaves little room for escape once instigated and its focus is both on compliance in terms of correct and timely lodgement and also the payment of due amounts.

Consequently, for unpaid amounts that were reported within 3 months of the due date, the DPN will provide the following range of options:

  • Payment of the debt
  • Appointment of an administrator under sections 436A 436B or 436C of the Corporations Act 1001
  • Appointment of a liquidator to wind up the company

However, for unpaid amounts that were unreported within 3 months of the due date, the only option is payment of the debt. It should be noted that prior to 2012, placing the company into voluntary administration could remit the penalty. This is no longer allowed and is known as the lockdown rule. Consequently, to preserve the right to enter into administration or liquidation ensure that all unpaid amounts are reported.

If one of the actions listed in the DPN is not taken within the 21 days, the director becomes liable for the penalty amount and the ATO may commence proceedings.

There are also several important and unusual elements of the Director Penalty Regime that should be highlighted.

Firstly, new directors may become liable for unpaid liabilities that were due prior to their appointment. As a new director, you only have 30 days from the date of appointment before you become liable, and you may be liable even if you resign within that 30-day period.

Secondly, former directors may also be liable for amounts due prior to the resignation.

It’s important to note that the DPN will be sent to the address filed with ASIC or your tax agent’s address. This is particularly relevant as the 21-day notice period commences on the date of posting, not the date of receipt, and an incorrect mailing address will not be considered an excuse.

While the obvious recommendation is to ensure that your company adheres to the reporting and payment regime under the ATO, there are defences available under the Director Penalty Regime. They include illness (or other reasons for non participation in the management of the company), the taking of all reasonable steps to ensure: that the company complied with the obligation to pay; or an administrator was appointed; or that the company would begin to be wound up. You can also show that no reasonable steps were available for you to take as a director, but you must show that no reasonable steps were available for each of the three options — payment, administration and liquidation — and not just one.