The idea behind DPN’s is to act as the big stick to hit directors so that directors cause their company to meet certain tax obligations or promptly place the company into liquidation or voluntary administration.
The law requires companies to withhold amounts from payments they make, such as wages to employees, and to pay those withheld amounts to the Commissioner (and to pay estimates of those amounts where applicable).
The regime of DPN’s makes directors of companies who fail to comply with their obligation to pay amounts withheld under the PAYG withholding regime to the Commissioner, personally liable for the amount that the company should have paid, through the imposition of a penalty.
Where the company fails to pay such amounts the directors become automatically personally liable to a penalty equal to the amount the company should have paid at the end of the day on which the company is due to meet its obligation.
However, the Commissioner must not commence proceedings to recover a director penalty until 21 days after he gives the director a written penalty notice.
A director can extinguish their personal liability by paying the debt or appointing an administrator or liquidator to the company within that 21 day notice period.
If the director does not take the appropriate steps within the 21 day period, the Commissioner may commence proceedings to recover the penalty. Certain defences are available to a director in such proceedings including:
1. If the director had an illness that prevented him or her from participating in the management of the company, or
2. If the director took all reasonable steps to ensure compliance within the notice period.
The Action Against Fraudulent Phoenix Activity proposal paper, which was released by the government for public consultation on November 14, 2009, set out a number of taxation law and corporations law options addressing fraudulent phoenix activity.
The paper concluded that the director's ability to put-off payment of the penalty until they receive a notice, and then to avoid liability absolutely by liquidating the company, was a significant limitation on the effectiveness of the Director Penalty Notice Regime.
As a result it was considered that the law required amendment to toughen the regime.
Changes in the DPN Regime
Recently the DPN regime has been strengthened. Directors' are now required to cause their company to comply with its liability to pay company liabilities, for PAYG payments and to pay superannuation guarantee amounts.
The amendments removed the ability for directors to extinguish their personal liability to pay penalties where the penalty has remained unpaid and unreported for more than 3 months.
Over two years' of industry debate on the issue, came to a head on 29 June 2012, when the Tax Laws Amendment (2012 Measures no. 2) Act 2012 received Royal Assent. This new legislation amends the Taxation Administration Act 1953 by:
• Extending the Director Penalty Notice Regime to make directors personally liable for their company's unpaid superannuation guarantee amounts;
• Ensuring that directors can not discharge their director penalties by placing their company into administration or liquidation when PAYG withholding or superannuation guarantee remain unpaid and unreported for 3 months after the due date; and
• In some instances, making directors and their associates liable to pay PAYG withholding non-compliance tax (effectively reducing credit entitlements) where the company has failed to pay amounts withheld to the Commissioner.
Accordingly, if a payment that a director should have caused their company to pay has been outstanding for three months when a director is served with a director penalty notice, the director will no longer be able to remit that penalty by placing the company into administration or liquidation.
The director will remain personally liable to pay the amount of the penalty. The amendments also change the way the Commissioner collects tax using DPN’s. For instance, where a company fails to pay PAYG withholding amounts, the Commissioner has discretion to reduce a director's entitlement to PAYG withholding credits which can effectively increase the amount of tax that a director will have to pay when they complete their personal tax return.
New directors will be liable to a director penalty only where they become a director after the company has failed to meet its obligation by the due date and 30 days after becoming a director, the obligation has not been met. This is an increase in the grace period for new directors from 14 days under the old regime.
The amendments allow the Commissioner to serve DPN’s by leaving a copy or posting it to the address of the director's registered tax agent. Consequently, the DPN does not have to come to the attention of the director before it is valid.
It is valid whether the director is aware of it or not. Similar to the service of statutory demands under section 459E of the Corporations Act, 2001.
Directors still have the same defences available and therefore will be able to avoid personal liability if they can prove that due to illness they were not involved in the management of the company or they took all reasonable steps to ensure that the company complied with its obligations in respect of PAYG withholding and superannuation guarantee amounts.
Any one who is a director must now more than ever be vigilant in ensuring that PAYG withholding and superannuation contributions are paid by the company on time.
If directors believe that the amount cannot be paid then in order to avoid any personal liability for those debts the director must place the company into administration or liquidation within three months of the due date.
New directors appointed to companies will need to quickly become familiar with the company's accounts and take appropriate action within 30 days of their appointment if the company has outstanding PAYG withholding or superannuation contribution amounts.
The rationale of the amendments is to ensure that directors are proactive in ensuring that PAYG and superannuation payments are made rather than reactive to the receipt of a DPN by which time it could and often is too late for the Commissioner to get paid.
The penalty for inaction is for the amount that should have been paid by the company to become a personal debt of each director jointly and severally.
Directors no longer have the luxury of waiting until a director penalty notice is served on them before taking appropriate action to extinguish their personal liability in respect of the penalties.
Steve Brown is chairman of Etienne Lawyers. Contact him at sbrown@etiennelaw.com
