Directors take note: penalty notices to cover more company debts

On 5 July 2011, the Federal Government released the Tax Laws Amendment (2011 Measures No. 7) Bill 2011: companies' non-compliance with PAYG withholding and superannuation guarantee obligations (the draft legislation). The draft legislation is designed to:

1. better protect workers' entitlements to superannuation;
2. strengthen director obligations; and
3. enhance deterrence of fraudulent phoenix activity.

The draft legislation aims to achieve these objectives by:

1. expanding the Director Penalty Notice (DPN) regime to incorporate unpaid superannuation guarantee amounts;
2. enabling the Australian Taxation Office (ATO) to commence recovery of an amount demanded under a DPN without providing the current 21 day grace period where the unpaid tax debt is overdue by more than 3 months; and
3. restricting access to Pay As You Go (PAYG) withholding credits for company directors and their associates where the company has failed to pay withheld amounts to the ATO..

What are Director Penalty Notices?

Director Penalty Notices have been around since 1993 as part of the "trade off" for the loss of priority afforded the ATO prior to the 1993 amendments (which also established Part 5.3A dealing with administrators). The DPN provisions of the Taxation Administration Act 1953 (Cth) give the ATO the power to collect outstanding PAYG taxes deducted from employee wages by making directors liable for a penalty in the same amount as the unpaid taxes if the company does not pass on those taxes to the ATO.

Under the current laws, the ATO may commence proceedings to recover the penalty from the directors 21 days after the DPN is issued. Currently, DPNs may only be issued in respect of unpaid PAYG withholding tax.

Defences to Director Penalty Notices

There are currently two principal defences available to a director issued with a DPN. First, the director may establish a defence by proving that it was unreasonable for the director to take part in the management of the company, and the director did not take part, during the relevant period in which the unpaid taxes were incurred due to illness or other good reason. Secondly, it is open to the director to prove that the director took all reasonable steps to make the company comply with its obligations to remit the unpaid tax to the ATO.

The draft legislation adds two additional defences, namely that a director will not be liable under a DPN where the director proves that he or she took all reasonable steps to cause an administrator to be appointed to the company, or to cause the company to be wound up.

Changes to the Director Penalty Notice Regime

The draft legislation extends the DPN regime to include unpaid superannuation guarantee charge (SGC) amounts. It also allows the ATO to commence recovery proceedings against a director without waiting 21 days from when the DPN is issued where the unpaid taxes (i.e. PAYG or SGC) are overdue by more than 3 months.

The draft legislation brings into legislation a commitment made by the Gillard Government in the lead up to the 2010 federal election, and was announced in the 2011-12 Budget. Accordingly, the Federal Government will be pressing to pass the legislation during the current parliament.

From the commencement of the amendments to the DPN regime directors will need to be extra vigilant that both PAYG and SGC taxes are remitted on time to the ATO to avoid personal liability for those unpaid amounts. Directors should also get advice on their obligations and particular circumstances early where there is a risk of PAYG or SGC liabilities not being paid on time.