Prior to the 2012 changes to ATO enforcement powers, directors with companies that were financially struggling would simply fail to lodge BAS and other returns. The ATO couldn’t chase or issue notices for what they didn’t know was outstanding.
Tax debts were down the priority list of creditors and could be easily held at bay. Not any more.
The crux of the new regime is the lodgement of returns. If directors fail to lodge returns the Director Penalty Notice regime is triggered.
Directors are automatically held to personally liable for unpaid company tax debts if a company fails to lodge PAYG or SGC returns within 3 months of the due dates.
Personal liability cannot be avoided by the appointment of a voluntary administrator or a liquidator.
Don’t not lodge returns
Failing to lodge falls apart as a strategy because the ATO can make a reasonable estimate of the company’s PAYG and SGC liabilities.
The ATO’s estimate then becomes the amount that directors will be held personally liable for.
Automatic personal directors’ liability can be avoided by lodging returns within 3 months of the due date.
If the company fails to pay its tax debts after filing its returns. the ATO can still issue penalty notices against the directors.
The Directors Penalty Notice will give directors 21 days from the date of the notice to take action.
– Pay the outstanding debt; or
– Appoint a voluntary administrator; or
– Appoint a liquidator; or
– Negotiate a payment arrangement with the ATO, or
– Dispute the issue of the notice.
New Directors Personally Liable for Old Debts.
New directors can be held personally liable for PAYG and SGC liabilities of the company incurred before they were appointed.
New directors will be held liable even if they resign as director shortly after their appointment.
Conduct a thorough due diligence of a company’s tax liabilities for any company a client is proposing to become a director of.
The 6 Trip-ups for Directors
- Directors that have set up ATO payment arrangements and faulted on those arrangements.
- Directors avoiding the Tax Office contact.
- Where there has been a history of non-compliance in tax and with failed companies.
- Companies with spiraling debts and little prospect of the tax debts being met.
- Directors who have not kept their corporate details with ASIC up-to-date. The ATO will send penalty notices to the Directors’ addresses as shown on the ASIC records. Remember the time starts running from the date of posting not the date received.
- Not taking action when a Director’s Penalty Notice has been issued. The notice gives only 21 days to action. Time is critical.
The Smart Director’s Guide
- DO NOT become a director of a company without verifying all tax liabilities have been met.
- Lodge all tax returns on time.
- If the company can’t pay its liabilities set up a payment arrangement.
- Don’t ignore contact with the tax office. Seek professional advice. Don’t ignore but discretion is called for in what is disclosed to the Tax Office.
- Keep your address up to date with ASIC.
- If you receive a Penalty Notice act fast – you have 21 days from the date of the notice to take action.
- If debts are spiraling out of control seek professional advice.
- A penalty notice has been issued and there is no money to pay. Seek professional advice as to whether you are personally liable and if so whether there are grounds to have the notice cancelled.