Whilst one of the advantages of setting up a company structure is to try and quarantine company debt away from the individual, there are times where an individual can, in fact, be liable for a company debt.
This can occur when a company fails to pay outstanding amounts to the ATO with respect to GST, PAYG and Superannuation.
If a company fails to meet its obligation to pay these amounts a liability is created automatically which means that no specific notices need to be issued or steps need to be taken by the ATO before the debt becomes an amount payable by the director.
Directors can be personally liable for outstanding GST, PAYG or Superannuation obligations in the following circumstances: -
They were a director of the company when the company failed to pay the withheld amounts when they were due; and/or
They became a director after the date the payment was due and if they are still a director 30 days after the amount was due but is still unpaid.
Director Penalty Notices (DPNs) are issued by the ATO to put the directors on notice that it intends to pursue a claim against the director personally and, in some instances, provides option for the directors to undertake to prevent enforcement of the personal liability.
There are two types of DPNs that can be issued by the ATO, Non-Lockdown and Lockdown DPNs.
A Non-Lockdown DPN might be issued when a company’s BAS and IAS have been lodged within 3 months of their due dates, and their SGC Statements have been lodged within 1 month and 28 days after the end of the relevant quarter. In these instances, the ATO may provide directors with options that need to be undertaken within 28 days of the notice being issued in order to prevent the directors becoming personally liable for the outstanding amounts. These options include:
Payment of the debt in full
Appointing an Administrator to the Company
Appointing a Small Business Restructuring Practitioner to the Company
Beginning to wind the company up / Appointing a liquidator to the company
However, if the company’s GST, PAYG and SGC lodgements are not made within the above time periods, a Lockdown DPN may come into play. In these instances, there are no options, other than payment of the debt in full, to prevent the company directors from being personally liable for the outstanding amounts. At this stage the company’s directors may need to seek their own advice with respect to personal insolvency options.
There are some instances where associates of a company director may also be made personally liable to pay outstanding PAYG Withholding amounts. Associates can include relatives, partners, a spouse, or children of the company director. In order for an associate to be deemed liable, however, the Commissioner must determine that the associate knew, or could reasonably be expected to have known, that the company failed to pay the withheld amounts. However, an associate should not be liable if they can show that they:
took reasonable steps to influence the director to make the company notify the Commissioner about the amount withheld;
took reasonable steps to influence the director to make the company pay the withheld amounts to the Commissioner;
took reasonable steps to influence the director to appoint an administrator, or have the company wound up or appoint a small business restructuring practitioner; or
reported that the company had not paid the amount withheld to the Commissioner or other relevant authority.
If you have any queries regarding Director Penalty Notices, or Insolvency generally, please feel free to contact me at aruhe@smbadvisory.com.au
This article is intended to provide general information only in summary format on relevant issues. It does not constitute legal or financial advice, and should not be relied on as such.
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