Company directors beware – less time to pay outstanding tax

Even directors of small companies can be held liable for the tax debts of their businesses. And they may have less time to pay those debts than they thought. By TERRY HAYES

By Terry Hayes

Company directors, even directors of small companies, can be held liable for the tax debts of their companies. And they may have less time to pay those debts than previously thought.

Let me explain. 

Where a company fails to send money deducted from the salaries or wages of its employees (that is, pay-as-you-go, PAYG, withholding amounts) to the tax office, then the directors of the company at the relevant time will be personally liable for an automatic penalty equal to the amount of the unremitted or unpaid amounts. This penalty comes in the form of a director’s penalty notice.

Generally speaking, a director has 14 days within which to respond to a penalty notice.

Under the provisions of the tax law, directors who receive such a notice have four options by which they can avoid personal liability. They can do this by ensuring that the company, on or before the due date for payment of the penalty, takes one of the following actions:

• Pays the unremitted amount to the Commissioner.
• Enters into an agreement to make payment to the Commissioner and honour that agreement.
• Has an administrator appointed.
• Goes into liquidation.

If the director fails to do any of the above, he or she becomes personally liable for the amount unpaid.

So, if a company director receives one of these notices, he or she has 14 days within which to act and undertake one of the above four options.

A crucial point for company directors is the date from when that 14 day period begins to run.

Before a December 2007 decision of the NSW Court of Appeal (in DCT v Meredith), the situation was that the Taxation Commissioner accepted that a director’s penalty notice sent to a director by ordinary pre-paid post was “given” to the director at the time the notice would have been delivered in the ordinary course of post. The director then had 14 days after the day of that delivery to cause the company to act (as noted above).

However, the Meredith decision has changed that, and directors will now have less time to act.

In that decision, the court said the statutory precondition to recovery of unpaid tax from a company director under the tax law was satisfied by sending the notice by post to the address which appears in the records of ASIC.

Only recently, the tax office released what is known as a decision impact statement on the Meredith decision which outlines its response to that case.

The tax office says the Commissioner accepted the decision of the Court of Appeal that a director’s penalty notice sent to a director by ordinary pre-paid post will be “given” to the director at the time the notice is posted – and not at the time when it would have been delivered by ordinary post.

This difference in timing is critical.

The tax office states that, in the case of a director’s penalty notice given by the Commissioner (where the director is registered with ASIC as a current director), the Commissioner will calculate the time for compliance with the notice from the date on which the notice was posted, irrespective of whether or when the notice was received or delivered.

Accordingly, where compliance with the notice does not occur within 14 days after the notice is posted to the current director, the Commissioner will regard the relevant penalties as being recoverable from that director.

This means that if you are a company director and you receive a director’s penalty notice, don’t delay in responding to it. Consult your accountant or solicitor immediately.

Where the penalty is not paid and none of the options is taken, the Taxation Commissioner can commence bankruptcy proceedings against the director, not to mention potential action by ASIC.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.