The director penalty regime makes directors of companies that fail to comply with their obligation to pay amounts to the Commissioner personally liable for the amount that the company should have paid, through the imposition of a penalty.
Where the company fails to pay such amounts, the director penalty regime makes directors liable to a penalty equal to the amount the company should have paid at the end of the day the company is due to meet its obligation.
As a result of the Pay As You Go Withholding Non Compliance Tax Bill 2012 and the Tax Law Amendment (2012 Measures No.2) Act 2012 (together the New Regime), directors can now be found personally liable for their company’s unpaid PAYG, other tax amounts deducted from payments to third parties (but not GST), and superannuation guarantee charge payments.
Previously, directors could not be held personally liable for unpaid superannuation guarantee payments.
Other key changes arising from the New Regime are summarised below.
New PAYG withholding non-compliance tax
If a director or an associate of a director has received a tax credit for PAYG deducted, and the amount deducted was not remitted to the ATO, the director or associate may be liable to pay the additional tax (effectively cancelling out the credit they received for the PAYG that was not remitted): new Subdivision 18-D in Schedule 1 of Taxation Administration Act.
Changes to director’s liability for failure to remit PAYG
Directors who held office between the due date and the payment date must do one of three things by the payment date (referred to as the Three Steps):
cause the company to pay the money;
appoint a voluntary administrator; or
place the company into liquidation.
If none of these things are done by the due date, section 269-20 imposes penalty liability (equal to the tax not remitted) on directors (including de facto and shadow directors):
acting as a director between the due date and the payment date; or
commencing to act after the due date, unless they take one of the Three Steps within 30 days of commencing as a director of the company.
Recovery of penalty
Before suing any director for a penalty, the Commissioner must give a “last chance” warning notice (commonly referred to as director’s penalty notice). A director then has 21 days to:
if less than three months have expired since the due date (or their start date as a director, if later) – take one of the Three Steps; or
if more than three months have expired since the due date (or their start date as a director, if later) cause the company to pay (ie voluntary and winding-up as options are lost unless exercised within three months).
Lavan Legal comment
In addition to making directors more accountable for unpaid PAYG and SGC debts, the New Regime is likely to have the effect of reducing phoenix activity, as the New Regime imposes additional liabilities on directors, which the Commissioner will be able to recover from directors personally.
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