This may be the extreme scenario but the amendments to the Director Penalty regime contained within the Taxation Administration Act 1953 introduced in June 2012 provide for this exact situation.
Many of our readers would be familiar with the current regime however, we are often asked how the Director Penalty regime impacts on individuals who are about to be appointed to a board of directors and how does it affect individuals who have resigned their position as director of a company. The former query was recently considered by a group of individuals who were approached to accept nomination to act as directors of an unlisted public company on a volunteer basis.
This article seeks to provide some clarification on the potential exposure for new and former directors of companies and what should be considered prior to accepting nomination of a directorship.
The Director Penalty Regime
The Director Penalty regime is designed to ensure that directors cause the company to comply with certain taxation and superannuation obligations. The ATO may issue a Director Penalty Notice (DPN) equal to the company’s unpaid PAYG withholding amounts and SGC obligations. In order to discharge a penalty, a director must cause the company, within twenty one (21) days, to either:
- Pay the debt;
- Place the company into voluntary administration; or
- Place the company into liquidation.
In the event that the company has not reported the unpaid amounts within three (3) months of their due date, the only avenue of discharging the penalty is to pay the debt in full.
Implications for Former Directors
Directors should be aware that they cannot absolve themselves of potential personal exposure simply by resigning their position as director of a company. Former directors may be liable for penalties equal to the unpaid PAYG withholding and SGC liabilities of a company which were due up to the date of their resignation, and also in respect of liabilities which fell due after their resignation, but where the first withholding event in the reporting period occurred prior to the directors resignation. It is therefore, imperative that a director considering resigning their position on the board, ensures that all PAYG and SGC liabilities are up to date and also that the company meets its obligations for the quarter in which the resignation occurred.
New Directors and What to Consider
New directors need to be aware that they can become personally liable for not only debts incurred by a company following their appointment, but also debts due prior to their appointment. New directors have thirty (30) days from the date of their appointment before they become liable for penalties equal to:
- All of the company’s unpaid PAYG withholding liabilities.
- All unpaid SGC liabilities that were due after 29 June 2012.
To avoid a penalty new directors must, within thirty (30) days of their appointment, cause the company to pay the debt or appoint a voluntary administrator or liquidator. It is important to note that new directors cannot simply resign their appointment within the first thirty (30) days and hope to avoid a personal liability. In this case, the departing director would automatically become liable after thirty (30) days from the commencement of their directorship regardless of whether they remain a director or not. Therefore, prior to accepting a directorship, the individual must make comprehensive enquiries to ensure the company is up to date with its PAYG and SGC obligations.
Directors will avoid a liability for a penalty if they can establish that one of the below defences is available to them:
- They were ill, or for some other good reason, they did not take part in management of the company; or
- They took all reasonable steps to ensure that one of the following three (3) things happened:
- The company paid the amount outstanding;
- An administrator was appointed to the company; or
- The company was wound up.
Prior to accepting an appointment as a director of a company, the individual should make all reasonable enquiries of the company’s accountant and other directors to ensure that the company is up to date with its PAYG withholding and SGC obligations. At the very least, incoming directors should obtain an indemnity from the other board members or alternatively, have a plan in place that liabilities will be brought up to date within their first thirty (30) days in office. This is particularly pertinent for individuals looking at accepting roles as volunteers on boards of directors, given the effect a director penalty may have on their life outside of the organisation they now represent.
For former directors, if liabilities cannot be brought up to date prior to resignation, they should either delay their departure from the board to ensure they maintain adequate control over the decision making process of the company, or if all reasonable steps have been taken to ensure the company met its obligations prior to resignation, confirm that these efforts are documented in company records, such as minutes of meetings. That way if penalties are applied by the ATO in the future, a defence may be available to them.
In any case, should a penalty notice be received by a director or they are concerned that their company may not be meeting its liabilities for PAYG withholding or SGC, it is imperative that professional advice is sought immediately.