On the Hook: Directors in the Tax Firing Line

The personal responsibilities of company directors are getting more and more stringent with new laws proposed to extend directors’ penalty notice regimes to GST. This article identifies what personal liability a director holds for tax liabilities of a company and considers the potential defences available to a director that is issued with a director penalty notice (DPN).

Background

A DPN will be issued when a company fails to meet its pay-as-you-go (PAYG) withholding or superannuation guarantee charge (SGC) obligations.^[1] The DPN is one of the most effective and feared tools at the ATO’s disposal against non-compliant companies. A DPN creates a parallel liability with the corresponding company and creates a joint liability between two or more company directors (i.e. a DPN creates a personal liability on a company director in the same amount of the liability of the corresponding company). The DPN must outline the relevant company, income year and the amount of the non-compliance tax the individual must pay.^[2] Additionally, the DPN will also provide remission options available to the recipient.

Period of liability

Prospective directors must check for any unpaid or unreported PAYG withholding or SGC liabilities before becoming a director of a company. If a company has outstanding PAYG withholding and/or SGC liabilities, you should cause the company to lodge the relevant statement/s and pay those liabilities to avoid personal liability. During your directorship, you will generally avoid director penalties if you take steps to ensure that the company lodges and pays its:

1. PAYG withholding amounts to the ATO in time; and
2. SGC to an employees’ nominated super fund by the due date (or, if that doesn’t occur, lodge a SG statement and pay the resulting SGC liability to the ATO).

The cut-off points for liabilities to be attributable to you as a director are slightly different for PAYG and SGC. For PAYG, you are liable for unpaid amounts for reporting periods that had commenced while you were a director of the company. However, if you resign from your directorship before the first withholding event within the relevant period, you will not become liable for that amount or subsequent amounts. For SGC, you are liable for unpaid liabilities that started while you were a director. However, if you resign before the last day of the quarter, you will not become personally liable for amounts after that period.

Introduction of GST

Relevantly, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (Bill) was introduced on 4 July 2019. The Bill amends the Taxation Administration Act 1953 (Cth) to authorise the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances.^[3]

Defences

There are certain defences under the Taxation Administration Act 1953 (Cth) that may be arguable by a director.^[4] Generally, the application of the defences has been narrowly applied by the Courts, limiting their application to only exceptional circumstances. This does not mean that they are not arguable, but that caution should be taken when relying on them.

A director may have a defence in proceedings against them if they are able to prove that because of illness, or some other good reason, it would be unreasonable to expect that the director ‘at any time’ took part in the management of the company.^[5]

Alternatively, in circumstances where a director has taken all reasonable steps to ensure the company’s compliance, the director may have a defence. To establish an all reasonable steps defence, the director must be able to provide evidence that they took all reasonable steps to cause any of the actions set out above to happen. The director does not have to evidence that the actions were actually undertaken by the company, the director merely has to evidence that he or she took all reasonable steps available to them to ensure that the steps were undertaken by the company.

Alternatively, a defence may be available in circumstances where ‘there were no reasonable steps [the director] could have taken to ensure that’ the company complied with its obligations.  

To establish a ‘no reasonable steps’ defence, evidence must be provided to support the argument that there were no reasonable steps that the director could have taken during the period to which the liability relates and is provided for in the DPN. That is, during the director’s directorship with the relevant company, evidence would need to be provided to support the argument that they were (at all times) unable to take any reasonable steps to:

1. cause the company to comply with its obligations;
2. cause the administration of the company; or
3. cause the company to begin to be wound up (within the meaning of the Corporations Act 2001 (Cth)).

Finally, a defence may be available in circumstances where a company has treated the Superannuation Guarantee (Administration) Act 1992 (Cth) as applying in a particular way that is reasonably arguable if the company took reasonable care when applying that Act to the relevant matter.

Conclusion

Although DPNs pose as a significant concern to past, present and future directors, there are a number of compliance strategies and tools that mitigate a director’s personal liability that should be understood and complied with. The importance of compliance has been illustrated in this article and shows the risks of liability that will result from non-compliance and the strict approach the courts have taken in applying the legislative defences available to directors. Finally, the potential addition of GST amounts expanding the tax obligations covered by a DPN increases the level of diligence required when acting or considering appointment as a director of a company.