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Financial mangement: New directors beware

Every Issue

Cite as: March 2013 87 (3) LIJ, p.71

Amendments to legislation mean increased risk for incoming directors who may inherit personal liability for existing company liabilities.

The Australian Taxation Office (ATO) has held the power to recover certain company taxation obligations from directors personally by the issuing of director penalty notices (DPNs) since June 1993. Under the DPN provisions, a director is personally liable for any unremitted withholding taxes (e.g. Pay as You Go) once the due date for payment has passed and the company has not met its liability.

When individuals are appointed directors of a company, they have an obligation to ensure that the company remits any outstanding withholding taxes. However, they do not automatically accrue a personal liability for these unpaid amounts from day one.

Directors can also mitigate the accruing of any further personal liabilities (but not those liabilities that have accrued up to that time) by resigning as a director. What is little understood are the company’s tax liabilities, which an incoming director effectively “inherits” on accepting an appointment.

The government recently amended the rules which apply to the timeframes under which incoming directors must act to avoid personal liability with respect to Pay as You Go (PAYG) withholding tax and Superannuation Guarantee Charge (SGC) liabilities that existed before they took office.

These timeframes are designed to avoid penalising new directors for the company’s existing non-compliance, but to make them accountable once they have had adequate time to remedy any outstanding obligations.

Previously, a new director had 14 days from the date of their appointment to deal with any of the company’s outstanding PAYG obligations before becoming personally liable (and subject to the DPN provisions) for the outstanding PAYG debts.

An incoming director now has 30 days after accepting an appointment before becoming personally liable for:

  • all unpaid PAYG amounts owed by the company, regardless of age and whether the ATO has been notified of the liability; and
  • any SGC liabilities incurred in the first SGC quarter after 29 June 2012 (i.e. the June 2012 quarter SGC liabilities) and which remain unpaid.

Notwithstanding that an incoming director becomes personally liable for any outstanding PAYG and SGC obligations 30 days after their appointment, the ATO is still required to issue a DPN before it can proceed with recovery proceedings against the director personally.

Where the company’s outstanding PAYG and SGC tax obligations have been reported within three months of their due date (even if they have not been paid), the legislation requires the ATO to issue a standard DPN which will grant a director the three remission options to avoid personal liability, i.e payment of the debt, placing the company into administration and/or liquidation within the 21-day notice period.

However, pursuant to the new provisions, which came into effect on 29 June 2012, where the company’s outstanding PAYG or SGC liabilities remain unreported and unpaid for more than three months after their due date, then the new “lock down” provisions apply.

What this means for a new director is that three months after their appointment, if the PAYG and SGC liabilities remain unreported and unpaid, the DPN issued by the ATO will not include any ability for the penalty to be remitted by placing the company into administration or liquidation. In other words, the DPN will simply require payment.

While some safeguards exist to protect new directors, these exemptions offer limited protection against the enhanced scope for potential liability.

If you are an incoming director, you need to be acutely aware of the potential liabilities where the company has outstanding PAYG and SGC liabilities. Sometimes such liabilities will not be listed on the ATO statements as they relate to debts that have not been reported. Some ways in which you may seek to mitigate potential unforeseen risks of inheriting such personal liability include:

  • conducting thorough due diligence of existing unreported and unpaid PAYG and SGC liabilities before you consent to being appointed a director of the company; and
  • ensuring proper governance procedures are in place to ensure that a company complies with its reporting obligations for all taxes, but especially amounts withheld under the PAYG and SGC withholding regimes.

While efforts can be made to mitigate or reduce the risks, it will not be possible to totally eliminate them.

Andrew Yeo is a partner in Pitcher Partners Business Recovery and Insolvency Services division in Melbourne. He can be contacted on ph 8610 5190.


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