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Payroll & GST Article – Director penalty notices

Directors are personally liable to pay certain unpaid tax owed by their company to the Commissioner of Taxation. Soon, this is likely to also include GST. This personal liability can be avoided by taking appropriate timely action. Directors need to be aware of when these liabilities can arise and which steps need to be taken (and when) to avoid personal liability.

Directors of companies registered under the Corporations Act 2001 are personally liable to pay penalties equal to amounts of certain tax debts which their company owes to the Commissioner of Taxation (the Commissioner). The object of the penalty is to ensure that a company pays its relevant tax debt or goes into either voluntary administration under the Corporations Act or liquidation promptly.

In broad summary, the directors are treated as jointly and severally guaranteeing the company’s obligations to pay the relevant tax debts to the Commissioner. Company directors will avoid the penalty where the company pays the relevant tax debt or (within a statutorily defined time-frame) goes into administration/liquidation.

To the extent that a director pays the penalty, the payment discharges the liability of the company to pay the corresponding debt (and vice versa). Similarly, to the extent that one director pays the penalty, the payment discharges the corresponding penalty imposed other directors of that company. The tax law entitles the paying director to seek repayment from the company and certain contributions from the other directors.

Which tax debts are directors personally liable for?

Current tax debts included

The relevant tax debts presently include the following amounts:

  1. Unpaid superannuation guarantee charge (SGC) amounts.
  2. Where the company has an obligation to pay the Commissioner’s estimate of an unpaid superannuation guarantee charge amount — the amount of the estimate.
  3. Where tax law requires the company to withhold amounts from a payment being made to a person and for the withheld amount to be remitted to the Commissioner — as a general rule, any amount that is withheld and not remitted to the Commissioner. This includes PAYG amounts, certain amounts paid by religious institutions to religious practitioners, certain employment termination payments, payments on account of unused annual leave or (to a certain extent) long service leave, and certain amounts which must be withheld where the payee has not quoted a TFN/ABN.
  4. Where tax law requires the company to pay an amount to the Commissioner due to the company providing a non-cash benefit to a person that would necessitate an amount being withheld if the company had provided the benefit in cash — as a general rule, the amount that has to be paid to the Commissioner.
  5. Where the company has an obligation to pay the Commissioner’s estimate of the withheld amount described in subparagraph (iii) or the amount described in subparagraph (iv) — the amount of that estimate.

(Note: In relation to the liability for the amount mentioned in subparagraph (ii) there is likely to be a corresponding liability for an amount described in subparagraph (i). To the extent that a sum is paid in discharge of one of these liabilities, the payment discharges a corresponding part of the other. Likewise, payment of part of an amount referred to in either of subparagraphs (iii) or (v) will discharge the corresponding part of the other amount. The same principle applies to amounts described in subparagraphs (iii) and (v) and will also apply to unpaid GST and estimates of unpaid GST mentioned in the next paragraph.)

Proposed extension to include GST

Under proposed changes, the director penalty provisions will also apply to net amounts of GST. As a result of the changes, directors will incur a penalty for a net amount of GST which the company should have, and has not, paid to the Commissioner (unpaid GST). Where a company’s GST liability has not been assessed (i.e. the company has not lodged a BAS for a tax period and, as a result, the GST has not been quantified), the Commissioner will also be able to estimate the net amount of GST and recover the estimate from the company. Additionally, the Commissioner will also be able to recover the estimate from the directors as a penalty. As noted above, under the director penalty provisions:

  • receipt of a payment for the estimate will reduce the underlying primary liability for GST and vice versa; and
  • payments of penalties by directors will reduce the company’s liability and vice versa.

At the time of writing, the amending legislation is before the Commonwealth Parliament.

Director penalties for GST (apart from those applicable to GST payable by instalments) are included in the general discussion below. A more detailed discussion of GST director penalties, including practical examples, is provided in our accompanying GST Article – Significant proposed changes to GST recovery: Recovering estimates and directors’ personal liability.

Which directors are subject to penalties?

The tax law imposes the penalties on persons:

  • who are directors for purposes of the Corporations Act 2001 (the Act); and
  • were directors at certain times.

For purposes of the Act, ‘director’ includes a person who is appointed a director and a person who acts in the position of a director (even though they have not been validly appointed as a director). Where directors are accustomed to act in accordance with a person’s instructions/wishes, that person is also a director for purposes of the Act.

Whether a director is subject to a penalty in respect of a particular failure by the company to pay a relevant tax debt depends on when the tax debt arose and when the person became a director. This is discussed in the section below.

When is a director subject to the penalty?

It is beyond the scope of this article to do more than give a broad indication of when a penalty arises and the circumstances in which the penalty will be remitted.

As practical observation, at a bare minimum directors should seek detailed professional advice immediately they become aware that a statutory superannuation contribution, withheld amount, amount payable to the Commissioner in relation to non-cash benefits, any net amount of GST, or Commissioner’s notice of tax estimate has not been paid on time and they are unable to ensure that the company immediately and properly (e.g. without preference of creditors) pays the relevant SGC, the relevant withheld amount, the relevant non-cash benefit amount, amount of GST, or notified estimate in full.

As a cautionary addendum, in our experience directors do not always appreciate that the SGC amount will include amounts additional to the requisite statutory superannuation contributions and also that for SGC purposes such contributions need to be calculated using a broader concept of wages than the concept normally used to determine superannuation contributions.

There are two categories of directors who are subject to the penalty.

Persons who are directors at the time of the company’s tax obligation arose

In broad terms, a person needs to consider whether they:

  • were a director on or after the day identified as the relevant ‘initial day’ in the table below; and
  • were a director at any time during the period up to the end of the relevant ‘due day’ (see table).

Persons who become directors after the due day form the second category of directors and are considered later.

If the company has not paid the tax debt and has not either:

  • had an administrator appointed under certain provisions of the Act (gone into administration); or
  • begun to be wound up within the meaning of the Act (gone into liquidation)

before the relevant ‘due day’, the directors will incur the penalty. The penalty arises at the end of the due day. However, they may be wholly or partially relieved of the penalty if timely action is taken, as outlined after the table.

Applicable Tax Debt Initial Day Due Day
Unpaid SGC for a particular quarter Day which is the end of the quarter to which the SGC charge relates;   Date on/by which company is obliged to pay the SGC charge for the relevant quarter
Estimate of unpaid SGC made by the Commissioner* *Under Div. 268 of Sch. 1 to the TAA 1953 (TAA), the Commissioner can issue a formal notice of estimate of the unpaid SGC. The last day of the quarter to which the estimate relates Day on/by which the company is obliged to pay the estimate to the Commissioner
Withheld amount Day the company withholds the amount Date on/by which the company is obliged to pay the withheld amount to the Commissioner
Provision of a non-cash benefit Day on which the company provides the benefit Day on/by which the company is obliged to pay the amount in respect of the non-cash benefit to the Commissioner
The Commissioner’s estimate of either the unpaid withheld amount or the unpaid amount referrable to a non-cash benefit* * Under Div. 268 of Sch. 1 to the TAA, the Commissioner can issue a formal notice of estimate of the liability (underlying liability) of the amount withheld/to be paid. (i)     Where the company is a medium/small withholder on the last day of the period, identified in the notice of estimate as the period ­to which the underlying liability relates — the last day of that period. (ii)     In any other case — the day by which the company is obliged to pay the underlying liability to the Commissioner. Day on/by which the company is obliged to pay the estimate to the Commissioner
Unpaid GST for a tax period* *Proposed Day on which the tax period (i.e. the quarterly/monthly etc. period in respect of which the company is required to lodge its BAS) ends Day on which the company is obliged to pay the assessed net amount for the tax period (i.e. normally the day on/by which the BAS for the tax period should be lodged)
Estimate of unassessed net amount of GST for a tax period (estimated GST)* *Proposed The last day of the tax period to which the estimate relates Day on/by which the company is obliged to pay the estimate to the Commissioner

Basically, the penalty will be wholly/partly remitted where the tax debt is paid, the company goes into administration, or the company goes into liquidation before the Commissioner formally notifies the director of the penalty or within 21 days of the notice being given. The notice is given when the Commissioner leaves or posts the notice, not when it is received by the director.

The extent of the remission arising from the company going into administration or going into liquidation (the event) depends on:

  • in the case of an SGC amount — whether the event occurs on/before the due day;
  • in the case of an estimate of SGC — whether the event occurs on/before the date on which the company was obliged to pay the underlying liability (i.e. SGC) to which the estimate relates;
  • in the case of an unpaid withheld amount or an unpaid amount referrable to non-cash benefits — whether the event occurs within three months* after the due day;
  • in the case of an estimate of either an unpaid withheld amount or an unpaid amount referrable to non-cash benefits — whether the event occurs within three months* after the day by which the company was obliged to pay the underlying liability the estimate relates to;
  • in the case of unpaid GST — whether the event occurs within three months* after the due day;
  • in the case of estimated GST — whether the event occurs within three months* after the day by which the company was obliged to lodge its BAS for the tax period for which the Commissioner has estimated the net amount of GST; and
  • other matters specific to the relevant tax debt.

(*Note: For a person who becomes a director in/after the specified three-month period, remission depends on the company going into administration/liquidation in the period of three months after the day on which the person becomes a director. This will be especially relevant to new directors, discussed below. However, it could also be relevant to some directors who are not ‘new directors’ in relation to some tax debts that are estimates.)

If the company is placed in administration/liquidation within the relevant window, there will be full remission.

However, where the company is placed in administration/liquidation after the relevant window (and within 21 days after the penalty notice) then, depending on other matters specific to the relevant tax debt, there will either be limited or no remission. For instance, in the case of a tax debt that is unpaid SGC, where the administration/liquidation occurs after the relevant window ending (in this case) on the due day, the penalty is only remitted to the extent that tax debt has been disclosed in an SGC statement lodged by the company within the time required by the Superannuation Guarantee Administration Act 1992.

Persons who become directors subsequent to the company’s tax obligation arising

Where a company has a relevant tax debt, a person who becomes a director of a company after the due day applicable to that tax debt (a new director) is potentially subject to a penalty in relation to the debt. However, a new director will not be subject to the penalty if within 30 days of the due day (30-day window):

  • the company pays the debt; or
  • the company goes into administration/liquidation.

The penalty imposed on a new director is due and payable at the end of the 30th day from the relevant due date.

The penalty for new directors will be wholly/partly remitted basically in the same circumstances as those discussed above in relation to other directors. However, remission of penalties (apart from penalties for unpaid SGC/estimated SGC) should be accessible through action within the substituted three-month period commencing on the day they became directors, as mentioned in the note at the end of the discussion.

Suggestions to reduce penalty risk

This article aims to make directors generally aware of their potential personal liability for certain tax debts owed by their company to the Commissioner.

Some matters the directors could consider in risk reduction are:

  • obtain advice specific to their company in relation to the nature and timing of its obligations to notify the Commissioner of its tax liabilities that can lead to director penalties and its obligations to pay those liabilities – e.g. advice could be sought from the company’s tax adviser or auditor;
  • ensure management provides the directors with a timely flow of information to enable the directors to determine at the time the advised obligation is due (or earlier where possible), whether the company has met (or will meet) the obligation on time;
  • implement systems to ensure that management brings ad hoc tax liabilities such as the Commissioner’s notification of estimates of tax liability to the timely attention of directors – the estimate is a liability and also indicates that there is an underlying tax liability that needs immediate attention;
  • as a bare minimum practical guide, directors should seek detailed professional advice immediately they become aware that any statutory superannuation contribution, withheld amount, amount payable to the Commissioner in relation to non-cash benefits, net amount of GST, or notice of tax estimate has not been paid on time and they are unable to ensure that the company immediately and properly (e.g. without preference of creditors) pays the relevant superannuation guarantee charge, the relevant withheld amount, the relevant non-cash benefit amount, net amount of GST, or notified estimate in full;
  • while not diminishing the importance of compliance with other tax obligations, especially monitor the company’s compliance with making statutory superannuation contributions, having regard to the manner in which liability for superannuation guarantee charge can escalate and the stricter avoidance/remission requirements applicable to SGC;
  • in conjunction with the first dot point, seek advice specific to their company in relation to the timetable for action which leads avoiding or remission of penalties;
  • from time to time update all advice obtained, to take account of any changes in their company’s tax obligations; and
  • immediately seek advice when a director penalty notice is received, because the 21-day window for a degree of remission may still be relevant in some cases.

Although the tax law provides some defences to the imposition of penalties, these have limited application. In the case of the Commissioner’s estimates of tax, there may also be scope to challenge the quantum of the estimate.

Persons contemplating appointment as directors should consider their potential exposure to a penalty due to the historic tax debt of a company or even potential failure to meet tax debt payments in the future. It is important to investigate a company’s tax compliance history and current situation, and also obtain detailed advice before accepting an appointment as a director. In any event, new directors should be mindful of their 30-day window in relation to taking action following their appointment and seek appropriate advice.

This article has not attempted to consider directors’ general/corporate law duties to ensure their company meets its taxation obligations and avoids incurring the Commissioner’s general interest charge and other penalties. Directors should also consider their duties in relation to their company meeting its state/territory (including municipal) tax obligations.