There have been recent changes to the Director Penalty Notice regime. The stated aim of these changes is to stop certain fraudulent activity, particularly with “phoenix” companies.

However in this tough economic environment, where companies are suffering cash flow liquidity problems, the changes could impact on directors of cash strapped companies who are having problems paying their superannuation and PAYG Withholding obligations.

Broadly, under the new Director Penalty Notice regime, directors can be made liable for certain of the company’s tax liability, including unpaid Superannuation Guarantee Charges (SGC), unpaid PAYG withholding amounts on salaries/wages, interest, dividends and royalties. Directors’ liability for unpaid corporate income tax liability is enforced by other ways such as a reparation order under section 21B of the Crimes Act 1914.

This is a summary of the new Director Penalty Notice regime.

Director Penalty Notice (DPN)

The DPN regime is now expanded to make directors personally liable for their company’s unpaid superannuation guarantee amounts.

   –      A DPN can be issued based on the company’s tax liability under its obligation and
this happens regardless of ATO’s assessment process.

   –      A DPN will be issued based on the reported amount however the Tax Office can
estimate the liability using a process similar to default assessment when the
company doesn’t report.

   –      The Tax Office can deduct the amount of a DPN directly from a director’s personal
tax return refund.

   –      A Garnishing notice can be sent out 21 days after the DPN is served.

   –      The Commissioner can serve a DPN by leaving a copy or posting it to the address of
the director’s registered tax agent.

Traps

   –      Through a DPN, each and every director owes the same amount as the company’s
total liability for tax.  For example, if the company’s unpaid liability is $9,000, each
director’s DPN will be for $9,000

   –      Under the deemed service provision, a DPN is deemed to be served to the director
when it is posted to the residential address of the director based on the ASIC
records.

   –      The expansion of the DPN regime to SGC starts from June 2012 quarter. For
example if the company fails to pay the June 2012 super by 28 July 2012, it should
report SGC and make payment to the Tax Office no later than 28 August 2012. A
DPN can be served because the company missed the deadline of 28 August 2012.

   –      DPN can apply to a director of a not-for-profit organisation that operates through a
corporate structure.

   –      DPN can also apply to a director of a corporate trustee that employs staff (in their
capacity as a trustee).

   –      Directors can face a DPN if the company fails to withhold the correct amount of
PAYG withholding from an employee’s pay.

  Remission of DPN

   –      With the exception of the Lockdown rule (refer below), within 21 days of a DPN, the director
can get automatic remission of the DPN by either:

• pays the amount outstanding,

                     • comes under voluntary administration, or

                     • has a liquidator appointed.

   –      If the company complies with DPN within the 21 day compliance period, the director
penalty will be remitted.

   –      If the company does not take appropriate action within this timeframe, recovery
action (such as Garnishee notices) may then commence against the director for the
penalty.

   –      ATO can directly deduct penalty amount of DPN from the director’s personal tax
return refund.

Trap

   –      Resignation doesn’t discharge the director from the company’s tax liability that arose
while they were a director.

  Defence (section 269-35)

   –      One defence is that the director did not take part in the management of the company
because of illness or for some good reason.

   –      Another defence is that a director took all reasonable steps to pay or there were no
such steps available (absence of cash is not a reasonable reason).

   –      For SGC, if the director took reasonable actions (e.g. seeking professional advice)
and believed the employee was a contractor, then later on the Commissioner finds
they are not a contractor, the director will not face DPN.

Traps

   –      The defence of “did not take part in the management of the company” is very hard to
prove as you need to show continuous inability to manage the company.

   –      New directors will be liable to a DPN only from the period they become a director and
the company has failed to meet its obligation by the due date and 30 days after
becoming a director, the obligation has not been met.

   –      For the purposes of DPN, the definition of directors is taken from the Corporations
Act i.e. a deemed director will be the director who can be issued with a DPN.

  Lockdown

   –      Lockdown refers where 3 months has lapsed after the due day for the company
liability and the liability remains unpaid and unreported.

   –      After Lockdown a director will no longer be able to remit DPN by placing the
company into administration or liquidation.  The director will remain personally liable
to pay the amount of the penalty.

   –      If the liability is not reported within three months within of its due date,
the director can no longer relinquish the DPN by voluntary administration
or liquidation.

Trap

   –      Once the DPN is issued and lockdown starts the
director’s ability to put the company into voluntary administration as a defence
mechanism is removed.

All company directors, including directors of corporate trustees and not-for-profit organisations that operate   through companies, must make sure they are aware of their own personal liability risks, and take appropriate steps to ensure that company tax liabilities are properly managed.

For any queries regarding this Taxation Alert, please contact Steve Fitzsimons on 02 9232 5111 or Steve.Fitzsimons@hr-ss.com.au.