A director of a company that has a tax debt to the ATO (often in relation to PAYG withholding amounts) may be served with a Director Penalty Notice. The aim of a Director Penalty Notice is to make directors liable for their company’s unpaid tax debt. Director Penalty Notices have undergone some very significant changes. As part of the new regime these changes came into effect on 1 July 2010.
The ATO used to allow the company 14 days to remit the penalty before they commenced recovery proceedings. This has now increased to a 21 day period which is not negotiable and starts from the date the notice was posted, rather than the date it was received by the recipient. The court also has no power to grant relief to a director from their obligations in respect to a Director Penalty Notice.
Under the old regime a Director Penalty Notice allowed the recipient to comply with the notice in four different ways. These were by either paying the tax debt in full, entering into an installment arrangement or by appointing a voluntary administrator or a liquidator before the recovery processes were commenced. In accordance with the new regime, the option to enter into an installment repayment arrangement to comply with a Director Penalty Notice and avoid personal liability has been removed. Now, if a director issued with a notice enters into an installment agreement he or she will simply delay the tax office from commencing the recovery proceedings. The director’s personal obligation to the tax debt will not be enforced during the 21 day period while the payments are being made.
It has become much more difficult for a director to rely on the defence of “illness or other good reason” this is because under the new regime there are extra criteria to be met. The director must establish that he or she was ill, or that there was a good reason why he or she did not participate in the management of the company while the relevant tax liability fell due. On top of this, the regime requires the director to also establish that it would have been unreasonable to expect the director to have taken part in the management of the company at that time.
To avoid personal liability, the recipient of the Director Penalty Notice must do one of the following within 21 days of the notice being issued.
– Comply with the obligation to pay the relevant tax liability in full.
– Appoint a voluntary administrator.
– Appoint a liquidator and begin to wind up the company.
The Director Penalty Notice clearly states the dollar amount of the tax debt owed by the director’s company. If you are a director it is important to be aware that if you receive a Director Penalty Notice and do not undertake one of the three options within the 21 days allocated, you can become personally liable for the tax debt of the company. What this essentially means is that the ATO can then commence action against you rather than the company to collect the outstanding debt.
If your business has a tax debt or you have received a Director Penalty Notice it is vital that you seek professional advice and quickly! There can be significant ramifications for not complying with the ATO’s notice, this can include losing personal assets such as cars, property or shares. Here at The Quinn Group our team of tax lawyers and accountants are experienced in dealing with the ATO and tax debt issues. For more information on the changes to Director Penalty Notices or about other tax debts submit an online enquiry. Alternatively, call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166.