In April 2020, company directors were made personally liable for their company’s unpaid GST, wine equalisation tax and luxury car tax. This liability has been added to director’s previous personal liability for the pay as you go (PAYG) withholding tax and the superannuation guarantee charge.
Essentially, if your company fails to pay these government taxes and charges to the Australian Taxation Office (ATO), you may be held personally liable as the director of that company. This is referred to as the Director’s Penalty Notice (DPN) regime.
How does the DPN regime works?
The regime applies when a company is required to pay an assessed net amount to the ATO. An assessed net amount means the net amount assessed for the tax period. Put simply, an assessed net amount is just the money owed to the ATO.
The Commissioner of Taxation may issue a DPN to any director of a company after the due date of the assessed net amount has passed and the amount is still outstanding. The DPN penalty may be reduced or removed entirely if the director attends to payment of the outstanding amount owning to the ATO before the DPN is issued or within 21 days after the date the notice was issued.
What happens if I don’t pay a DPN?
The discretion to reduce or remove the penalty may not apply if the director is slow to pay the outstanding assessed net amount or to initiate insolvency (such as appointing an administrator or entering into liquidation).
If a director fails to pay an assessed net amount and has also not lodged their company’s business activity statement (BAS) within three months of it falling due, the penalty will be ‘locked down’. A locked down penalty means that directors are automatically personally liable for that amount. Placing the company into liquidation will not remove a locked down penalty.
We recommend consulting a legal and financial professional if you have received a DPN, or if a DPN has been locked down.
A company director may avoid liability where either:
- they have fallen ill; or
- has another good reason where it would be unreasonable to expect the director to take part in the management of the company at the relevant time; or
- they have taken all reasonable steps to ensure the company compiled with its obligations.
What does this mean for existing company directors and startups?
If you are the director of a company, you must ensure that any outstanding amounts to the ATO are paid in full and on time. To be held personally liable means your personal assets are on the hook. Your own car or house may be placed at risk should the ATO look to pursue these assets to pay off the debt that you (as a director) are made liable for under the DPN regime.
What does this mean for any new startups looking at incorporating a company or becoming a director?
For new directors, make sure you understand the obligations and risks with becoming a company director and
& the duties of directors under the Corporations Act. If you are joining an existing company as a director, then you should conduct adequate investigations and due diligence enquiries into that company prior to being appointed as a director to ensure that the company has no tax liabilities which you may be liable for under the DPN regime.
It might be a great idea to check that your company’s director and officer insurance (D&O Insurance) also covers tax related liabilities. This insurance may help keep you protected in the event you are issued with a DPN.
If you need some advice as to how the DPN regime may affect you and your business, get in touch with the Bolter Squad. We’ll cover your legal issues while you focus on your business.