Director Penalty Notices: RUN, DON’T WALK!

Given the Australian Tax Office’s role as Australia’s principal revenue collection agency, it is hardly surprising that parliament has given the tax man some particularly powerful tools to help him go about his business.

One such tool that is not widely understood (including by those directors who have had the unfortunate experience of receiving one) is the “Director Penalty Notice”.

All companies that have employees must withhold income tax when paying their employees (PAYG). That withheld tax automatically becomes a debt owed by the company to the ATO and if the company fails to pass it on before the due date, the directors of the company become personally liable for the entire debt (the due date for the remittance of PAYG depends on the date the PAYG is withheld and the size of the company).

Terrifying, isn’t it?

But it is not quite as bad as it seems: before the ATO can collect the debt from the directors, they must first send them a Director Penalty Notice. The directors then have 14 days to comply with the notice or face personal liability for the amount stated in the notice. The time limit is a strict one: the ATO has no discretion to extend the period and the period runs from the date the notice is sent, not the date it is received. This means that, in reality, most directors only have, at best, about 11 days to comply.

Directors have 4 options to comply with a Director Penalty Notice:

  1. Pay the Amount in Full – If the company is able, it should pay the ATO the money without delay.
  2. Enter into a Payment Arrangement with the ATO – The ATO and the company can reach an agreement for repayment of the debt by instalments or otherwise. However, negotiating such an agreement may well take longer than 14 days and, if an agreement cannot be reached, there might not be enough time to comply with one of the other options. If this option is to be explored, the best thing to do is to seek professional advice from people who are used to dealing with these matters and the ATO.
  3. Appoint a Voluntary Administrator – The directors can, by majority, appoint a Voluntary Administrator to the company promptly and quickly. The process generally only takes a couple of days. Professional advice will ensure that the process is completed properly. Too often though, directors appoint the Voluntary Administrator too late and incur a personal liability anyway. Further, usually where the ATO has issued a Directory Penalty Notice, other debtors are also knocking at the door. For this reason, the smartest thing for the directors to do may be to appoint a Voluntary Administrator. In fact, the directors may even be obliged to do so under the Corporations Act.
  4. Appoint a Liquidator – Generally, winding up by applying to the Court is not an option for directors as the process usually requires more than 14 days to be completed. To comply with the notice, the order to wind up the company must be actually made within the 14 day period; merely making an application for an order to wind up the company will not be enough.

Recent changes to the Corporations Act allow for what is known as a Creditor’s Voluntary Winding Up to happen more speedily where a 75% resolution of the shareholders is passed. The Corporations Act has strict requirements when going about a Creditor’s Voluntary Winding Up and most directors will find that professional advice is necessary.

The most important thing for directors to understand is that they cannot simply sit on a Director Penalty Notice and hope that it will go away. The possibility for personal liability is very real, the time limits are strict and the options are limited. With early action and good, professional advice, directors can avoid that personal liability.

While Director Penalty Notices may seem to be, at the moment, relatively uncommon, the word on the street is that the tax man is looking to ramp up his use of these notices in these difficult times, as companies are increasingly using PAYG tax as an easy means of cash flow funding.

For information in relation to Director Penalty Notices or insolvency and corporations law generally, please contact us on 3223 6100 or email helenam@redchip.com.au.

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