If you're a director of a company that is struggling to meet its Pay As You Go Withholding (PAYGW) and Superannuation Guarantee Charge (SGC) obligations, you need to be vigilant.

As a director, you are personally liable for any PAYGW or SGC liability that remains unpaid by its due date.  In some circumstances the Commissioner of Taxation will issue you with a Director Penalty Notice (DPN) imposing a Director Penalty (Director Penalty), which allows the Commissioner to commence legal proceedings to recover PAYGW and SGC debts of a company from you personally. The Commissioner can also collect these debts through other means – e.g. by withholding personal tax refunds otherwise due to you.

How much is the Director Penalty?

The Director Penalty is equal to the amount of PAYGW and SGC liability due and not remitted to the Commissioner. In most cases the Commissioner will determine the penalty amount using information provided by the company (e.g. as reported on Business Activity Statements), although in some cases the Commissioner may also estimate the amount.

Can a Director Penalty be remitted?

A Director Penalty can be remitted if the outstanding PAYGW and SGC liability is paid at any time.

Remittance can also occur if at any time on or before the 21-day period from the date the DPN is issued expires, the company is put into voluntary administration or liquidation, provided it is also the case that the company has reported its PAYGW and SGC liabilities to the Commissioner within three months of their due dates.

If the company has not reported its PAYGW and SGC obligations to the Commissioner within three months of their due dates, placing the company into voluntary administration or liquidation will not protect a director from a DPN liability.

The remittance provisions apply to: 

  • PAYGW and SGC liabilities incurred after 30 June 2012; and
  • Un-extinguished PAYGW liabilities incurred before 30 June 2012.

What defences do directors have?

If it has not been possible to protect your position by putting the company into voluntary administration or liquidation, you may be able to rely on one or more of the defences available under section 269-35 of the Taxation Administration Act 1953 (Cth) to avoid liability for a Director Penalty.

The defences available are:

1. Illness

A director will not be liable for a Director Penalty if, because of illness or for some other good reason, it would have been unreasonable to expect the director to take part (and the director did not take part) in the management of the company during the period to which the Director Penalty relates.

2. Reasonable steps

A director will not be liable for a Director Penalty if the director took all reasonable steps to ensure that:

  • the directors caused the company to comply with its PAYGW and SGC obligations;
  • the directors caused an administrator to be appointed to the company under the Corporations Act 2001 (Cth); or
  • the directors caused the company to begin to be wound up.

Additionally, a director will not be liable for a Director Penalty if there were no reasonable steps the director could have taken to ensure the matters above happened.

The onus is on the director to establish either the "illness" or "reasonable steps" defence.

What are reasonable steps?

In the recent case of Roche v Deputy Commissioner of Taxation [2015] WASCA 196, the Court of Appeal considered that what isreasonable for the purposes of this defence does not depend merely on the actual knowledge of the director, but involves an objective test. The director must prove that he or she took all steps which were reasonable, having regard to the circumstances of which the director, acting reasonably, knew or ought to have known.

The Court stated that the defence would only be made out if the director had considered all of the alternative events noted above - causing the company to comply, causing an administrator to be appointed, and causing a liquidator to be appointed - either by taking reasonable steps to ensure that the event occurred, or by declining to do anything about that particular event on the basis that there were no reasonable steps that the director could have taken to ensure that the event occurred.

The Court noted that the defence would not be made out if the director had only considered one of the alternative events.  Therefore, simply taking reasonable steps to ensure that the company's PAYGW and SGC obligations were discharged would not be enough if in fact those obligations were not discharged, and the director then did not take reasonable steps to cause the company to be administered or liquidated.

How can a director show reasonable steps?  

In order to rely on the reasonable steps defence if you are a director of a company that has unpaid PAYGW or SGC debts to the ATO, you will need to consider all three events contemplated by the defence, not just one. Among other things, you should ensure that:

  • you make regular enquiries as to whether the company is meeting its PAYGW and SGC obligations;
  • you specifically turn your mind to how the company will meet its PAYGW and SGC obligations;
  • there are systems or processes in place to ensure that the PAYGW and SGC obligations are met; and
  • you follow up and continuously monitor the position in relation to the payment of those obligations.

These steps are particularly important if you are a non-executive director, as it will not be a sufficient defence to say that you are not involved in the day-to-day management of the company.

If your company has outstanding PAYGW and SGC liabilities, it is important you take steps early to ensure that you can establish a defence in the event that you are issued with a DPN. If you have been issued with a DPN and you're not sure how to proceed, we strongly recommend you seek legal advice as soon as possible.