Thinking | 17 February 2021

Liability of directors and associates for company tax obligations

By Scott Butler

In the second of our series of articles on the avenues for small to medium businesses to deal with their overdue tax debts, we look at when directors and their associates can be held personally liable for a company’s tax debts.

A director must ensure that a company complies with its obligations regarding pay as you go (PAYG) tax, the superannuation guarantee charge (SGC) and goods and services tax (GST).[1] Where a company fails to do so, each director of the company becomes personally liable to pay a penalty equal to the company’s unpaid liability.[2]

If a person becomes a director after the due day for payment of the liability, that person will only become liable for a penalty if, 30 days after their appointment, the company has:

  • not complied with its obligation;
  • not appointed a small business restructuring practitioner;
  • not had an administrator appointed to it; or
  • not begun to be wound up.[3]

Recovering the penalty

Where the Commissioner has the right to recover a penalty, there are several recovery methods available to the Commissioner, such as:

  • garnishee notices;
  • offsetting the director’s tax credits against the director’s penalty; or
  • initiating legal recovery proceedings against the director to recover the penalty.

Director penalty notices

The Commissioner may only commence legal recovery proceedings against a director for a penalty after a director penalty notice (DPN) has been given to the director.[4] The Commissioner endeavours to issue DPNs as soon as practicable after a director has incurred a penalty. This is in line with the purpose of DPNs, which is to induce directors to cause a company to pay the outstanding liability or have the company brought under external administration in order to protect the interests of all creditors.[5]

There are two types of DPNs: non-lockdown DPNs and lockdown DPNs. Non-lockdown DPNs are issued to directors of companies that have not paid their PAYG, SGC or GST liabilities by the due date but have:

  • lodged their business activity statements and instalment activity statements within three months of the liability’s due date; and
  • lodged their superannuation guarantee statements by the due date.[6]

Non-lockdown DPNs provide that a penalty can be ‘remitted’ (ie avoided) where, either before a DPN is issued or within 21 days after the DPN is given, a company appoints a small business restructuring practitioner, is placed into administration or begins to be wound up.[7] A liquidator must be appointed to the company for the debt to be remitted on the basis of the company being wound up; deregistering a company[8] or making an application to wind up a company and a provisional liquidator being appointed is not sufficient.[9]

If a company both fails to pay its PAYG, SGC or GST liabilities by the due date and fails to lodge its statements in the required timeframes above, a lockdown DPN will be issued. A lockdown DPN does not allow for the penalty to be remitted unless the debt is paid in full.[10]

A DPN is deemed to have been given at the time the Commissioner leaves or posts it,[11] regardless of when or if the director actually receives the DPN.[12]

Contents of a DPN

A DPN must include the following information:

  • what the Commissioner thinks the unpaid amount of the company’s liability under its obligation is;[13]
  • that the director is liable to pay the Commissioner, by way of penalty, an amount equal to the company’s liability because of the director’s obligation;[14] and
  • the main circumstances in which the penalty will be remitted.[15]

A DPN may cover more than one penalty, but must provide the above information for each of the penalties.[16] 

Estimates of PAYG withholding, superannuation guarantee obligations or GST

The director penalty provisions also apply to any estimates the Commissioner has made.[17] If a company does not report its PAYG withholding, superannuation guarantee obligations or GST, the Commissioner may make a reasonable estimate as to what the company’s liability is having regard to anything the Commissioner thinks is relevant.[18] The Commissioner must provide written notice to a company of the estimate[19] and the amount of the estimate becomes due and payable when the notice is given.[20]

Defences to a DPN

There are three defences available to directors when faced with a penalty.[21]

First, a director will not be liable if an illness or other good reason meant it would have been unreasonable to expect the director to take part, and the director did not take part, in the management of the company when the company failed to comply with its PAYG, SGC or GST obligation.[22] This defence will only be made out where a director has not participated in the management of the company for the entire relevant period, being from (and including) the due day until the expiry of the DPN, payment of the debt by the company, or commencement of small business restructuring, administration or winding-up.[23]

Just because a director did not ordinarily participate in the management of a company will not usually constitute a good reason, regardless of whether the director was aware or not of the company’s failure to comply with its PAYG, SGC or GST obligation.[24] If the director relies on ‘illness’, the director will have to show that the illness was sufficiently serious to prevent them from taking part in the management of the company.

Second, a director will not be liable if they have taken all reasonable steps, or there were no reasonable steps that could be taken, to ensure that the directors caused:

  • the company to comply with its PAYG, SGC and GST obligation;
  • an administrator of the company to be appointed; or
  • the company to begin to be wound up.[25]

To determine what are reasonable steps, one is to consider when, and for how long, a person was a director and took part in the management of the company and all other relevant circumstances.[26] What is ‘reasonable’ for a director is not limited to that director’s particular knowledge, but extends to what a reasonable director in that director’s position would have known if proper inquiries had been made.[27]

If a director notifies the Commissioner within 60 days of the Commissioner giving the director a DPN that the director has one of the above defences and the director provides information in support of the defence, then the penalty will be removed if the Commissioner is satisfied the defence exists.[28] If the penalty has not been removed and the Commissioner sues the director to recovery the penalty, the director can still argue the defences in court.[29]

The third defence only relates to unpaid SGC liabilities. A director will not be liable for a penalty in relation to SGC if the company did not comply with an SGC obligation because:

  • it did not think it had an obligation because of the way the company thought the Superannuation Guarantee Administration Act 1992 (SGC Act) applied;
  • that position was reasonably arguable; and
  • the company took reasonable care in applying the SGC Act.[30]

Reasonably arguable means ‘it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect’.[31]

Right of indemnity and contribution

If a director pays a penalty, they have a right of indemnity and contribution against the company and the other directors in respect of the amount that they paid.[32]

Associates of directors

Associates of directors can be liable to repay PAYG withheld from their salary or wages where those amounts are not paid to the ATO by the company. An associate includes a director’s relative (such as a spouse, parents or children) or any partners in a partnership with the director.[33]

An associate will be liable to repay the amounts withheld if the Commissioner is satisfied that, due to the associate’s relationship with the director or the company, the associate knew, or could reasonably have been expected to know, about the company’s failure to pay the withheld amounts.[34]

However, an associate will not be liable if they:

  • took reasonable steps to influence the director to:
    • cause the company to notify the Commissioner of the withheld amounts;
    • cause the company to pay the withheld amounts to the Commissioner;
    • appoint a small business restructuring practitioner;
    • appoint an administrator; or
    • have the company wound up; or
  • reported the company’s non-payment to the Commissioner or to another authority with responsibilities relevant to the operation of the company.[35]

[1] Taxation Administration Act 1953 (Cth) sch 1 s 269-15.  This also extends to Wine Equalisation Tax and Luxury Car Tax.
[2] Taxation Administration Act 1953 (Cth) sch 1 s 269-20.
[3] Taxation Administration Act 1953 (Cth) sch 1 s 269-30(3).
[4] Taxation Administration Act 1953 (Cth) sch 1 s 269-25.
[5] PS LA 2011/18, [48].
[6] Taxation Administration Act 1953 (Cth) sch 1 s 269-30.
[7] Taxation Administration Act 1953 (Cth) sch 1 s 269-30(1) and s 269-15(2).
[8] DFCT v Action Workwear Pty Ltd (deregistered) 96 ATC 4575.
[9] Re Scobie; Ex Parte DFCT 95 ATC 4525.
[10] Taxation Administration Act 1953 (Cth) sch 1 s 269-30(2).
[11] Taxation Administration Act 1953 (Cth) sch 1 s 269-25(4).
[12] See DFCT v Roche [2014] WASCA 194.
[13] Taxation Administration Act 1953 (Cth) sch 1 s 269-25(2)(a).
[14] Taxation Administration Act 1953 (Cth) sch 1 s 269-25(2)(b).
[15] Taxation Administration Act 1953 (Cth) sch 1 s 269-25(2)(c).
[16] Taxation Administration Act 1953 (Cth) sch 1 s 269-25(3).
[17] Taxation Administration Act 1953 (Cth) sch 1 s 269-10(4).
[18] Taxation Administration Act 1953 (Cth) sch 1 s 268-10.
[19] Taxation Administration Act 1953 (Cth) sch 1 s 268-15(2).
[20] Taxation Administration Act 1953 (Cth) sch 1 s 268-20(1).
[21] See Taxation Administration Act 1953 (Cth) sch 1 s 269-35.
[22] Taxation Administration Act 1953 (Cth) sch 1 s 269-35(1).
[23] Snell v Deputy Commissioner of Taxation [2020] NSWCA 29.
[24] See DFC of T v Robertson [2009] NSWSC 597.
[25] Taxation Administration Act 1953 (Cth) sch 1 s 269-35(2).
[26] Taxation Administration Act 1953 (Cth) sch 1 s 269-35(3).
[27] DFC of T v Saunig 2002 ATC 5135.
[28] Taxation Administration Act 1953 (Cth) sch 1 s 269-35(4A).
[29] Taxation Administration Act 1953 (Cth) sch 1 s 269-35(4)
[30] Taxation Administration Act 1953 (Cth) sch 1 s 269-35(3A).
[31] Income Tax Assessment Act 1997 (Cth) s 995-1(1); Taxation Administration Act 1953 (Cth) sch 1 s 284-15.
[32] Taxation Administration Act 1953 (Cth) sch 1 s 269-45.
[33] Income Tax Assessment Act 1997 (Cth) s 995-1(1); Income Tax Assessment Act 1936 (Cth) s 318.
[34] Taxation Administration Act 1953 (Cth) sch 1 s 18-135.
[35] Taxation Administration Act 1953 (Cth) sch 1 s 18-135(3).

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