Tax hazard ahead

It’s not uncommon for people to agree to become directors of companies (even small companies) without fully understanding what that means and the responsibilities that follow. Among other things, there are tax implications that are often not understood.

This is not a new issue but is obviously one that continues to arise. There is quite a steady stream of cases that continue to come before the courts and tribunals on this issue, indicating that many people still do not appreciate the responsibilities they have as directors.

The Tax Commissioner’s Small Business Consultative Group recently raised this as an issue of concern, so I’ve taken the opportunity in this article to cover some of the basic points to remember. The members of that group said there was a perceived general lack of knowledge by many people who have agreed to be directors of what obligations, including tax, applied to that role. Small business owners need to be aware of this important issue.

Perhaps the most significant tax issue concerns the responsibility of directors for the unpaid tax bills of the company. Where a company fails to remit PAYG withholding amounts (moneys deducted from the salaries or wages of its employees) to the Tax Office, those who were directors of the company at that time will be personally liable for an amount equal to the unremitted or unpaid amounts.

Under the tax law, the director penalty provisions automatically cause directors to become personally liable for this amount. This penalty comes in the form of a director’s penalty notice. Generally speaking, a director has 14 days within which to respond to a penalty notice.

Under the law, directors have four options to avoid personal liability. This can be done by ensuring that the company, on or before the due date for payment:

  • pays the amount owing in full to the Tax Office;
  • enters into a payment agreement with the Tax Office in respect of the PAYG amount;
  • comes under Voluntary Administration; or
  • has a liquidator appointed.

Failure to do one of those four things by the due date will result in each director automatically incurring a penalty equal to the company’s outstanding PAYG withholding liability.

And new incoming directors can be caught for PAYG debts incurred before they became directors.

A person who later becomes a director of a company who has an outstanding PAYG withholding liability will also incur a penalty equal to that liability unless one of those four things mentioned above occurs within 14 days of them becoming a director.

Acting quickly is critical
As noted above, in general, directors have 14 days within which to respond to a director’s penalty notice issued by the Tax Office. However, that 14 days commences from when the Tax Office posts the notice.

A decision by the NSW Court of Appeal in December 2007 (DCT v Meredith) found that a director’s penalty notice is effectively served from the time at which it is correctly posted by the ATO and that it is not open to the director to argue that non-delivery equates to non-service.

The Tax Commissioner has accepted that decision of the Court of Appeal so that a director’s penalty notice sent to a director by ordinary pre-paid post will be “given” to the director at the time the notice is posted – and not at the time when it would have been delivered by ordinary post.

Being a company director carries a serious responsibility. Being a director of a company with unpaid tax bills is even more serious.

Failure by a company to send moneys deducted from the salaries or wages of its employees to the Tax Office is not simply a timing issue. The message for SMEs to hear is that unpaid tax liabilities can fall on the directors – personally.
Company directors must not delay in responding to a director’s penalty notice. They should consult their accountant or adviser immediately when one is received.

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