Director Penalty Notices
Have you received a Director Penalty Notice in the mail from the Australian Taxation Office (ATO)? If so, you are facing a very tough decision. You may have just 21 days to either:
- Pay the debt in the Notice
- Appoint a liquidator or administrator
- Decide to become personally liable for the debt
A companies structure is there to protect its director from liability in case of business debt or insolvency. This Notice effectively makes you decide between closing your company or putting yourself on the line to save it. This means you could potentially lose your family home or face bankruptcy.
What is an ATO Director Penalty Notice?
The ATO uses three common debt recovery methods. One of which is the Director Penalty Notice. They usually issue a Directors Penalty Notice if your company has an unpaid debt that is not on an ATO payment plan. The Notice can collect unpaid Pay-As-You-Go (PAYG), tax and superannuation liabilities of companies directly from directors. This means the directors are personally liable for these company debts.
How do you know if a Director Penalty Notice will be issued?
In short, you won’t know until it’s too late. But there are a few signs the ATO may issue one:
- Your company has an outstanding tax debt which is not on a payment plan. You may have also failed a number of prior payment plans.
- You are not engaging with the ATO to enter into a payment plan.
- Various warning letters have been issued to you such as a Notice of Intended Legal Action or a Firmer Action Warning letter.
If you’re in this situation, it’s important to update the directors’ personal addresses with Australian Securities and Investments Commission (ASIC). This is the address the ATO will use to issue a Director Penalty Notice, so you’ll want to ensure you receive it immediately.
Which type of Director Penalty Notice have I received?
The ATO will issue one of two types of notice to you. A ’21-day’ Notice or a “Lockdown” notice. In short, the 21-day Notice allows the directors 21 days to avoid personal liability for the specified debts. The directors are automatically liable for the debts in the Lockdown Notice.
What determines which notice you will receive?
It all comes down to whether you have lodged your returns on time that relate to the unpaid debts.
|BAS, IAS SGC return lodged which has outstanding PAYG or Super debt||Type of notice you will receive||What it means for the director|
|On time or within three months of due dates||21 Day Notice||Director has 21 days to appoint an administrator or liquidator to avoid personal liability|
|After three months or not at all and ATO has raised assessment||Lockdown Notice||Director is automatically liable for company PAYG/SGC debts, even if liquidator appointed|
PAYG Tax debts are reported to the ATO on quarterly Business Activity Statements (“BAS”) and, if applicable, monthly Income Activity Statements (“IAS”). If your company can’t pay its employees’ superannuation each quarter, then it becomes payable to the ATO as Superannuation Guarantee Charge (“SGC”) and the company is required to lodge an SGC Statement.
21-day Director Penalty Notice
A 21-Day Notice will be issued when you have lodged your BAS, IAS and SGC Statement within three months of these documents’ due dates and these debts remain unpaid.
If you receive this type of Notice, you have 21 days from the date of the notice to exercise one of three options to avoid personal liability. The options are:
- Pay the debts;
- Place the company into voluntary administration; or
- Liquidate the company
A 21-day notice can be issued if ASIC has deregistered the company. So if your company has outstanding PAYG or SGC debts, it’s important to not let it be deregistered.
Lockdown Director Penalty Notice
A Lockdown Notice will be issued where the unpaid debts relate to BAS, IAS and SGC returns that have not been lodged within three months of their due dates, or at all.
These notices often follow a number of returns being lodged at once, or the ATO conducting an audit. Directors are not able to avoid personal liability for a Lockdown Notice even it is deregistered, or if a liquidator or administrator is, or has been, appointed to the company, or it is subject to a deed of company arrangement.
If your company has debts that fall into both categories, directors may receive both types of notices at once.
For easy reference, these are summarised below:
- When Returns Lodged Type of Notice the ATO can Issue Effect on Director
- By due dates or within 3 months 21-day Notice 21 days to appoint a liquidator or administrator to avoid personal liability.
- Lodged after 3 months or not at all Lockdown Notice Unable to avoid personal liability. Need to pay the debt from company or personal funds.
How does the ATO know the debt amount if the BAS, IAS and SGC returns haven’t been lodged?
If you haven’t lodged your returns the ATO can:
- Conduct an audit of your company’s records to determine your debt, or
- Estimate your debt based on other returns or information lodged.
What you can do if you have received a Director Penalty Notice?
First, check the type of Notice it is. If it is a 21-day notice, calculate 21 days from the date of the notice (not when you receive it) to understand when you have to act by.
Next, urgently seek professional advice. Your accountant or lawyer can help. However a specialist turnaround or insolvency professional can help answer the tough questions to assist you in making a decision. For example:
- What are your options?
- Is your company insolvent?
- Will your business be able to pay the Notice debt if it continues to trade?
- Is your business viable?
- Is it realistically achievable to rescue your business?
- What are your director’s duties to the company and its creditors including the ATO?
- What are the potential consequences for you personally under each of the options?
- Are all of your personal assets on the line for the company anyway?
If you are unable to pay the debt then you should enter into an ATO payment plan. A payment plan usually needs to pay the debt in full within 12 months, and ongoing lodgement and payment obligations need to be met. In some cases, you can enter a payment plan over 2 or 3 years, sometimes 5 with security. Payment plans comprise of monthly or weekly instalments and may require an up-front payment. If you’re struggling to obtain a payment plan, a tax debt loan may provide sufficient funds for the up-front payment.
Is each director liable for an equal share of a Director Penalty Notice?
No. Each director is jointly and severally liable for the debt. This means each director is liable to pay the full debt.
Where one director pays more than the others, section 269-45 of the Taxation Administration Act 1953 provides a right of indemnity to that director. This allows them to recover amounts paid from the company and any other director that was equally liable.
Are there defences to a Director Penalty Notice?
Yes, but only under strict circumstances. It’s important to note that failing to receive the Notice is not a valid defence.
As a director who receives a Director Penalty Notice, you may have a valid defence and avoid liability if you can establish that:
- You weren’t managing the company at the time it received the debts because you were ill or had another good reason.
- You took all reasonable steps to cause the company to meet its obligations to pay its PAYG or superannuation or appoint a liquidator or voluntary administrator to the company.
- For superannuation debts, the company had an arguable position that it took steps to ensure that it complied with its obligations to pay superannuation. An example of where this defence may be applicable is where the company believes it is engaging with a genuine subcontractor but are then deemed to be an employee. This leads to a higher SGC debt.
Further details are available at section 269-35 of the Taxation Administration Act.
Will you go bankrupt if you receive a Director Penalty Notice?
Not necessarily. But the key factors here are the amount of the Notice and other business debts, the financial state of your business, and your personal financial position.
Often if a company has outstanding tax and super debts it cannot pay, it also has other debts to suppliers, the landlord etc. If the business cannot pay, the creditors may call on their debts under director guarantees.
What if you can’t get an ATO payment plan or you suspect your company is insolvent?
Receiving a Director Penalty Notice is a clear warning sign of problems in your business. It also suggests potential insolvency, meaning your company is unable to pay all of its debts by their due dates.
If you are unable to obtain a payment plan for your ATO debt, the ATO may:
- Issue a garnishee notice to your company’s bank or a customer. This requires they pay funds owed to you directly to the ATO. If you’ve received a Director Penalty Notice they can issue this to your personal bank too.
- Issue a statutory demand and commence winding up proceedings to place your company in liquidation.
To avoid such action, it’s important to seek professional advice urgently to help deal with your situation. If you don’t, the ATO will take the decision out of your hands.
How do you avoid receiving a Director Penalty Notice?
Lodge your returns on time, or as soon as possible. If you can’t pay the full debt, submit a payment plan proposal at the time of lodging. Hiding your debt from the ATO by withholding lodgements doesn’t work, and can lead to a Lockdown Notice.
If your company has a PAYG or SGC debt which you are struggling to get on an arrangement, ensure the directors’ personal addresses are up to date with ASIC and deal with any Notice received urgently.
Does a Director Penalty Notice only apply to directors at the time the tax debt was incurred?
Surprisingly, no. If you become a director of a company you can be issued with a Director Penalty Notice for any eligible PAYG or SGC debts after 30 days. So it’s really important to conduct your due diligence into a company’s tax affairs before signing up as director, or upon appointment. If any information is withheld, such as tax portal print-offs, you should seriously consider refusing the role, or resigning within 30 days to avoid liability.
An unfortunate example on this point:
John, a bank manager, contacted us for help after receiving a Director Penalty Notice.
John and his father became directors of his Uncle’s restaurant in 2017. His uncle’s illness and age prevented him from continuing to run his restaurant.
When John took over, his uncle told him the company was profitable and its affairs were up to date. However, after making continuing losses for five months, John closed the business and resigned as a director.
In late 2018, a year after resigning as director, John received a Director Penalty Notice from the ATO. The notice advised him he was personally liable for the company’s outstanding superannuation debt totalling $80,500. The debt related to the period from 1 October 2014 to 31 March 2015 – three years before John became a director. The ATO found the debts when it conducted a superannuation audit, probably following an employee tip-off.
It was a “Lockdown” Director Penalty Notice because the debts were from a period where a Quarterly SGC Statement wasn’t lodged.
This meant that even if John put the company in liquidation he, and the other directors, were still personally liable for the full amount of the debt. If the company or the other directors (including John’s uncle) could not pay, John was responsible for the full amount of the debt. He could seek to obtain a loan to pay the debt or enter into an ATO payment plan. If he couldn’t pay the ATO debt, he would need to look at personal insolvency options such as a debt agreement or bankruptcy.
Unfortunately, John did not properly conduct his due diligence of the company’s tax affairs before becoming a director. It was only now upon receiving the Director Penalty Notice that he became aware that he could become liable for company tax debts that arose prior to his appointment.
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