Director Penalty Notices Video

Hi and welcome to the Insolvency Experts — I’m Steven Kugel.

Today we are going to talk about Director Penalty Notices issued by the Australian Taxation Office.

This is something that every adviser and director needs to know about. And you particularly need to understand the big trick or trap with a Director Penalty Notice that I will explain to you. But first —

A Director Penalty Notice may be issued by the Australian Taxation office in respect of unpaid PAYG withholding only — not GST or any other tax at this time, just unpaid PAYG – amounts withheld from peoples wages.

And if a Director penalty notice is issued, a director can be held personally liable for the tax debt of a company if they do not respond to the Penalty Notice within 21 days from the date on the notice.

Now, apart from the unusual ability to transform a company debt to a personal debt, you need to know that a director penalty notice will be sent to the directors home address as it appears on the ASIC register.

If a director does not maintain the ASIC register with a current address and the Notice is sent to a previous address, and because of this, it is not received until after the 21 days has expired, there will be no defence available to the director to avoid personally liable for the tax debt of the company.

In other words, it is no excuse to say the notice was not received because a director failed to maintain the ASIC register. A director must maintain current address details with ASIC.

Director Penalty Notice Issued

Now, if the ATO does issue a Director Penalty Notice, and they typically only do this when the company and its directors have no further credibility perhaps because the a string of failed repayment arrangements or broken promises, the Notice itself will allow a director 3 chances to avoid personal liability under the Notice — but each of those 3 chances needs to be done within 21 days — there are no extensions — no if’s or buts — 21 days means 21 days. And it’s 21 days from the date on the Notice — not the date of receipt so if you get one — get going — fast.

Now the 3 choices available and that must be achieved are;

1. Pay the debt in full – an obvious choice but typically, the company has had some type of financial issue and that is why it has been unable to pay the tax debt.
2. Appoint a Voluntary Administrator
3. Appoint a Liquidator

If a director can complete one of the three things noted within the 21 days, they will have avoided the personal liability that follows the expiry of a Director penalty Notice and protected their personal assets from potential loss.

It is worthy of note that the ATO cannot issue a Director penalty Notice once the company is placed into either Voluntary Administration or Liquidation so if a director suspects the ATO has had enough, the action of placing the company under external administration is one way to protect a directors personal assets.

Of course, there is a fourth and fifth option available under a Director Penalty Notice although they don’t explain these ones on the form.

Let’s say the fourth option is to do nothing. I don’t believe this is a good option as the director who does not action the Penalty Notice will be personally liable for the company tax debt once the 21 days has passed and the ATO will aggressively pursue these claims.

The fifth and final option is one which until 1 July 2010 used to allow directors to avoid personal liability under the Notice — but all that has now changed.

The fifth option and the one that was usually the most obvious and appealing to companies in trouble — would be to enter into a repayment arrangement to repay the debt over time.

As I said earlier, this used to be one of the options to avoid personal liability but since July 2010, the rules have been changed to being if a company director receives a Director Penalty Notice and wants to enter into a repayment arrangement with the tax office, they immediately assume personal liability for the company tax debt.

That right, the tax debt is theirs but the tax office at the time of entering into the agreement is happy to sit back and allow the company to try and repay the debt knowing full well that if the company then fails, that they have signed the director to personal liability for the tax debt!

This is why every professional advisor and every director needs to know about Director Penalty Notices.
In the next episode, I will explain one of the unknown tricks of Director Penalty Notices that you also need to know.