We often find that directors are unaware of an important section of law: Division 269 to Schedule 1 of Taxation Administration Act 1953 (Cth). This places a positive obligation on Directors to cause the company to meet its pay-as-you-go (PAYG) and superannuation guarantee charge (SGC) liabilities or to take action to ensure that the corporation takes certain steps.
This positive obligation on directors was further tightened in 2012 when the Tax Law Amendment (2012 Measures No 2) Act 2012 (Cth) and the PAYG Withholding Non-compliance Tax Act 2012 (Cth) were introduced. These amendments introduced:
- A furthered limited ability for director’s penalties to be remitted;
- Director penalties in relation to unpaid SCG liabilities;
- A PAYG withholding non-compliance tax for directors and associates; and
- A Director could no longer enter into a 222ALA agreement to be relieved of a potential Directors Penalty Notice (DPN).
As a result of these changes, the ATO’s power has been broadened with the corporate veil being ‘lifted’ so as to hold directors personally liable in certain circumstances.
A Director’s obligation to meet the company’s obligation to pay a PAYG or SGC liability commences from the time an amount is withheld or the end of the SGC quarter respectively.
If the company reports a PAYG or SGC liability within 3 months of the liabilities due date for lodging a return, then remission of the penalty will occur in the following circumstances:
- Payment is made;
- The company is placed into administration or liquidation before a DPN is issued; or
- Within 21 days of the DPN being given.
However, if a PAYG or SGC liability is not reported within 3 months of the due date, the director can only avoid liability if:
- The company is placed into liquidation or administration within 3 months of the PAYG withholding becoming owing; or
- Within those 3 months, the ATO is notified of the PAYG liability.
The defences for a DPN are as follows:
- A director was significantly ill and did not take part in the management of the company;
- The director took all reasonable steps to ensure the directors complied with obligations;
- The company applies the relevant legislation in a particular way that was reasonably arguable.
These defences have been interpreted very narrowly and must be raised within 60 days of notification.
Case Studies
In the case of Deputy Commissioner of Taxation v Gorger [2002] NSWCA 336, it was noted that the DPN regime applies to Directors that are appointed for a short time and directors that are appointed after the date for remission has passed.
In the case of Fitzgerald v DCT (1995) 68 ATR 770 and Canty v Deputy of Commissioner of Taxation [2005] NSWCA 84 the DPN regime applies to retired Directors.
Is the Penalty Joint or Joint and Several?
It should be carefully noted that the liabilities attached to DPNs are parallel, that is they are Joint and Several. The ATO may seek the liability from 1 director or from all the directors of the company.
Conclusion
The ATO has more power now that it has ever had before, particularly when chasing certain debts owed such as PAYG and SGC liabilities.
Directors should pay careful attention to the due dates and the solvency of the company otherwise they expose themselves to personal liability by way of a DPN.
If the company is unable to pay PAYG or SGC then you need to seek urgent legal advice. Time is of the essence.
If your company is struggling or you have clients who are experiences issues paying the PAYG or SGC then please email James Frank on jfrank@franklaw.com.au or call 02 9688 6023.
The Takeaway
Not paying your PAYG and SGC liabilities are like having too much chocolate, it might satisfy you for a time, but you will be hurting as a result.
This is not legal advice.
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