Prior to 5 February 2020, if a Company fails to report its Pay As You Go Withholding Tax (“PAYG”) and Superannuation Guarantee Charge (“SGC”) obligations/liabilities within the below time period, the Director(s) automatically becomes personally liable for that Company debt.
- PAYG- 3 Months of the due date of the Business Activity Statement (“BAS”);
- SGC- 28 days from the due date of the statement.
In other words, if a Company does not have the capacity to pay the debt for the period in question, the Company’s debt will not be extinguished by placing the Company into external administration, but rather it becomes a personal liability of the Director(s). In such circumstances, the ATO can adopt appropriate debt recovery measures and procedures against the Director(s) to recover the Company’s debt, in full, to the point of BANKRUPTCY!
This is all made possible by the Director Penalty Notice (“DPN”) regime, which on 5 February 2020 was extended to include Goods and Services Tax (“GST”) to the list of items triggering automatic personal liability of a Director. Similarly to PAYG, should a Company fail to report its GST obligations/Liability within 3 months of the due date of a specific BAS, the Director(s) will become equally liable for that debt.
The purpose of the introduction of GST to the DPN Regime is to prevent future phoenix activities by removing the temptation to abuse the personal liability limitations of the prior GST legislation. In time, the new changes to the treatment of GST will force Directors to take more interest, care and diligence in meeting Company reporting requirements. Further, it will also create a fairer playing field when it comes to competition amongst companies within any particular industry and hence, it is for these reasons that such changes are welcomed.
It should be noted that the ATO may still attempt to make a Director personally liable for timely reported, yet unpaid PAYG, SGC & GST liabilities, however, in such cases the ATO is required to issue a Director Penalty Notice (DPN). Should a DPN be issued in such circumstances, the Director may extinguish personal liability of the Company’s debt by adopting one of the following options within twenty one (21) days of the said DPN;
- Pay the Debt in full;
- Appoint a Voluntary Administrator;
- Appoint a Liquidator.
In summary, the DPN Regime can be complicated and is forever changing. I encourage Directors to be observant and proactive in identifying and understanding proposed changes of same. The delegation of reporting obligations to third parties, including external accountants, and ignorance of statutory tax changes/developments is not a valid defence in the eyes of the law when faced with the perils of the DPN Regime. While the DPN Regime can have critical financial consequences for Company Directors, it isn’t all terrible news as there are actions that can be taken and steps that are necessary to guarantee that you do to control your liability under the DPN Regime. If you or your clients are currently experiencing this or require further information pertaining to the DPN Regime, I strongly encourage that you seek legal advice or approach our office immediately and definitely within twenty one (21) days from the date of DPN for accurate advice and clarification, as well as the implementation of a workable plan.