Potential Penalties for Company Directors

It is important for Company Directors to appreciate the extent of their duties and obligations under the Corporations Act 2001 and Income Tax Assessment Act 1936. The Australian Taxation Office is able to pursue Directors personally for unpaid PAYG amounts of Company employees that have not been forwarded to the ATO.

Company Directors are jointly and severally liable for the debt claimed. Directors of Companies have a duty to ensure that they know every detail about the Company’s cash flow, and ensure that the Company’s tax obligations are being met. You are never a Director “in name only”.

Your duty as a Company Director in that respect does not end simply because you have delegated certain tasks within the running of the Company to another Director. You must always have your finger on the pulse. The Directors are jointly and severally liable for any amount claimed under the Penalty Notice.

This means that if you are the Director of a Company being pursued by the ATO, then the ATO is able to pursue you personally for the whole of the amount claimed without having to pursue the other Directors. If you are issued with a Directors Penalty Notice, there are steps which you can take to remit the debt to the ATO.

Under section 222 AOB of the Income Tax Assessment Act you have the following options open to you:

• Pay the amount owed to the ATO
• Make an agreement with the Commissioner of Taxation in relation to the Company’s liability
• Appoint an administrator of the Company under section 436A of the Corporations Act.
• Begin to wind up the company within the meaning of the Corporations Act Once you have been provided with notice of the Directors Penalty Notice, you may wind up the Company and your personal liability to the ATO will be remitted.

Time limits apply. You typically have 14 days within the date of the Penalty Notice to start winding the Company up. The Penalty Notice is usually provided by post and as such, the rule on postal service will allow for an extra 4 business days on top of the 14 day window, however, you should always act fast if you find yourself in that situation.

A Company does not begin to be wound up until the members of the Company (not the Directors) resolve by special resolution that the Company should be wound up. As such, once a Directors Penalty Notice is served an extraordinary meeting of the Company’s shareholders should be called so that it may be resolved that the Company be wound up. Of course the primary objective is to avoid ever being in a situation where you are required to respond to a Directors Penalty Notice.

This can very simply be avoided by ensuring that you are fulfilling your obligations as a Director including ensuring that the Company is meeting all of its tax obligations and ensuring that funds withheld from employees, be forwarded to the ATO are not going elsewhere.

Nick Pidcock is the Commercial Lawyer at the Newcastle office of Burke, Elphick & Mead Lawyers. Please feel free to contact him with her Commercial Law enquiries.

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