DIRECTOR LIABILITY - DIRECTOR PENALTY NOTICE

Director Penalty Notice

Many businesses within Australia operate their business through a corporate structure as a means of reducing personal liability of the directors and shareholders.  A company is a separate legal entity that offers limited liability for its shareholders.

Generally, if a company cannot pay its debts its shareholders are not personally liable to pay the debts of the company.  However, directors can be personally liable for a company’s debts if they breach their legal duties, or act in high level negligence or illegality.

Many directors are currently operating their businesses through a corporate structure believing that they are personally protected by way of limited liability – meaning the company debts remain with the company.  This simply is not the case.

Director Penalty Notice

A Director Penalty Notice is a mechanism under Australian law that allows the Australian Taxation Office to collect unpaid Pay-As-You-Go (PAYG) tax and superannuation liabilities of a company directly from directors.  The aim of the Director Penalty Notice is to pierce the corporate veil and peruse the directors personally for PAYG and superannuation.  The protection afforded to directors is removed and they are no longer protected under a corporate structure.

Defences

Under the director penalty regime there are a number of statutory defences that outline circumstances in which a director is not liable to director penalties.

Directors will have a defence and not be liable for a director penalty if:

• the director did not take part (and it would have been unreasonable to expect the director to take part) in the management of the company during the relevant period because of illness or other acceptable reason;

• the director took all reasonable steps, unless there were no reasonable steps he/she could have taken, to ensure that one of the following three things happened:

  • the company paid the amount outstanding;

  • an administrator was appointed to the company; or

  • the directors began winding up the company (within the meaning of the Corporations Act 2001).

The courts have held that these defences must be proved for the entire period the director was under the obligation.

Recovery Options

If the Australian taxation office issues a Director Penalty Notice it must provide detail of the amounts owing and remission options available.  The recovery options may include:

• garnishee notices;

• offsetting the directors tax credits against the director penalties; or

• initiating legal recovery proceedings against the director to recover the director penalty.

Director Responsibility

Directors are personally responsible for making sure the company meets its PAYG withholdings, net GST and superannuation payments.  If a company fails to meet its obligations the directors of the company become personally liable.

To avoid liability directors should ensure that the company pays and lodges its:

• PAYG withholding;

• Net GST; and

• Superannuation.

Should you need any assistance understanding your obligations as a director the team at Wallace Law Group can assist you. Please contact Catherine Wallace catherine@wallaceweir.com.au for all your corporate legal needs.