Directors Penalty Notices FAQ’s

Directors Penalty Notices can be issues if a company falls behind on it’s payments to the ATO. Simply put, if you haven’t stayed up to date with your tax obligations, you may have a few issues that you need assistance with. Time is of the essence with these types of matters and getting them resolved fast is what NR Consulting do. So why not take a moment, pick up the phone or send us an email and start the ball rolling to make this issue a thing of the past and get back to being stress free.

What is a Director Penalty Notice?

If a company falls behind in the payment of its tax debts, the Australian Taxation Office (ATO) can issue a Director Penalty Notice.

The Notice is issued under Section 222AOE of the Income Tax Assessment Act to any or all directors in respect of PAYG withholding amounts – that is, the tax amounts deducted from employee wages and entitlements but not remitted to the ATO.

If the Director Penalty Notice is not complied with within the 14 days allowed, the director(s) will become personally liable for the outstanding debt of the company as listed in the notice.

If you’ve got a tax debt, this means your personal assets are at risk.

How does a Director Penalty Notice work?

The Director Penalty Notice, requires the director(s) to comply with the notice within 14 days of issue lest action to recover the debt will be taken against the director – personally! That is, the company’s debt will become a personal debt of the director(s).

In order to avoid the personal liability, a director must comply with one of the four options listed in the notice. Directors can either;

There are no extensions to the 14 day period!

If the director(s) fail to select one of the four options above within the 14 days allowed by the notice, the director assumes personal liability for the tax debt of the company as indicated in the notice.

If this is allowed to occur, this means your personal assets are at risk.

What do I do if I receive a Director Penalty Notice?

If you receive a Director Penalty Notice from the ATO, you will note it provides four (4) choices and allows 14 days only to achieve compliance.

You must do one of the things listed below.

The pros and cons of each are shown when you click on each point.

What if my company pays the debt and is then liquidated?

If a company pays the Debt in Full, it would seem the most obvious way of complying with a Director Penalty Notice but even this strategy has its risks.

If a company pays a tax debt pursuant to a Director Penalty Notice and is later placed into liquidation, the liquidator will scrutinise all payments made to creditors in the six (6) months before liquidation and may attempt to clawback any unfair preferences.

Payments made by a company following the receipt of a Director Penalty Notice may be considered preferential and able to be clawed back by liquidators.

If the liquidator takes action to recover such payments made, the ATO can in response, seek the reimbursement of any moneys they are forced to disgorge from the directors personally.

This means your personal assets are at risk.

Accordingly, it is essential that before any payments are made the directors determine, with a high level of confidence, that their company will remain solvent for the foreseeable future otherwise, the payment of a debt may just rebound on the directors personally.

What is the ATO policy on Tax Debts?

The following is an excerpt from the ATO Receivables Policy. The full policy can be found hereTax 1

“The potential to recover from directors:

  • Officers attempting to recover debts from companies may take all necessary steps to expand the Commissioner’s options to facilitate recovery from directors;
  • Directors of companies may be personally liable to pay a penalty equivalent to some amounts which have not been remitted by the company (per sections 222AOC and 222AOD of the ITAA 1936). A notice in terms of section 222AOE or section 222APE of Division 9 of Part VI of the Act (known as a Director Penalty Notice) cannot be served once a corporation is placed in liquidation (see chapter entitled ‘Payment agreements’). Accordingly, before taking action to wind up a company that has not remitted these specific amounts, a notice in terms of section 222AOE or section 222APE ITAA 1936 should be issued;
  • The Corporations Act also provides for directors to assume personal liability for debts incurred by a company while it was trading insolvently. It may, therefore, be appropriate to wind up a company with a view to having the liquidator pursue the directors for payment of the outstanding debt;
  • Cases where a director of a company currently indebted to the Commissioner has a past association with another company that went into liquidation leaving significant amounts owing, should be brought to the attention of the relevant technical area to take appropriate action.”

What is an insolvent company?

An insolvent company is one that is unable to pay all its debts as and when they fall due for payment.

There are serious penalties for allowing a company to trade while it is insolvent and accordingly, if your company is in financial difficulty, a director should seek advice on the options available.

Who is a Director?

A director is not just the person appointed to that role.

A person may also be a director even where they have not been formally appointed but are seen to act in that role or if the directors of the company act in accordance with their instructions.