What is a Director Penalty Notice?
A Director Penalty Notice may be issued by the ATO when a company falls behind in meeting its tax obligations. In particular, the Notice is issued under the Income Tax Assessment Act, to any or all directors in respect of PAYG withholding amounts; that is, the tax amounts that have been deducted from employee wages and entitlements but not remitted to the ATO.

What does a Director Penalty Notice require?
The Director Penalty Notice requires the mentioned director(s) to comply with the notice within 14 days, under threat of legal action being be taken against the director(s) to recover the debt. That is, the company’s debt is likely to become a personal debt of the director(s).

How can a director avoid personal liability?
A director issued with a Directors Penalty Notice must either (1) pay the debt in full, or (2) enter into an instalment arrangement to repay the debt, or (3) appoint a Voluntary Administrator, or (4) appoint a Liquidator.

What are the dangers of non-compliance?
The ATO gives no extensions to the 14-day period stated on the Notice. If a notified director(s) fails to select one of the four specified options within the 14 days allowed by the notice, the director(s) assumes personal liability for the tax debt of the company as indicated in the notice. If this is happens, it means that the director(s) personal assets are directly at risk.

What if I receive a Director Penalty Notice?
If you receive an ATO Director Penalty Notice, you will note it provides the four (4) choices and allows just 14 days to achieve compliance. You have no option but to select one of the listed options, or you will face the consequences.

What if our company pays the ATO debt but is then liquidated?

It may seem that the most obvious way of satisfying a Director Penalty Notice is to pay the tax, but this strategy has its own risks. When tax has been paid in response to a Director Penalty Notice and the company is later placed into liquidation, the liquidator will scrutinise all payments made to creditors including ATO in the six (6) months before liquidation and may attempt to claw-back any unfair preferences. In such a case the ATO payment may be considered preferential and be subject to claw back by liquidators. In such a case the ATO would likely seek reimbursement, from the directors personally, of any moneys they are forced to remit.

How can directors mitigate the risk to their personal assets?
A liquidator’s claw-back of an ATO payment from a Director Penalty Notice will almost certainly place your personal assets at risk. It is essential therefore, before making such a payment, that the Directors determine with a high level of confidence that their company will remain solvent for the foreseeable future.

What is the ATO policy on Tax Debts?
The laws relating to ATO Receivables Policy are complex and best interpreted by a suitably qualified legal practitioner. If the need arises, TAP has access to and may refer you to a trusted legal advisor.

What does “insolvent trading” mean?
The term means incurring new debt without the ability to pay. There are serious penalties for Directors who allow a company to trade while insolvent, that is, when unable to pay its debts as and when they fall due for payment. If your company is in financial difficulty, you should seek professional advice on the options available. See also Section — Insolvent Trading

Can other persons be deemed to be Directors?
Directors include not only those people who are registered as Directors, but also people who act as directors, even if they are not formally appointed. Shadow or “de facto” directors, and even other parties in control of the company at the relevant time, may be deemed to be directors. The “other parties” definition does not include people who give advice as part of a contracted professional role, including accountants, managers and other paid consultants.

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