Directorship offers an exciting opportunity to influence a company’s direction, but it also carries significant legal responsibilities. One area often overlooked by newly appointed directors is the risk of incurring personal liability for company tax debts under Australia’s director penalty regime.
Liability of Newly Appointed Directors
If a company fails to remit to the Australian Taxation Office its Pay As You Go (PAYG) withholding, Goods and Services Tax (GST), or Superannuation Guarantee Charge (SGC), the Commissioner of Taxation may issue a director penalty notice (DPN) alerting the director(s) that they may become personally liable for the unpaid amount. A failure to take appropriate action within the stipulated timeframe will crystallise that liability.
Notably, a director appointed after the company has already incurred those unpaid obligations is not protected from the possibility of incurring personal liability, even though they were not a director at the time the liabilities were incurred.
Division 269 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (TAA 1953) requires directors of a company to ensure the company has complied with its obligations to pay taxes by their respective due date. Section 269-15(2) of Schedule 1 states that the director’s duty to make their company pay those taxes will only cease once payment is remitted, an administrator is appointed, or the company is wound up.
Section 269-20 of Schedule 1 to the TAA 1953 provides that if:
- a) you are appointed as a director after the due date of the relevant penalty; and
- b) the obligations arising from that penalty had not yet been fulfilled; and
- c) you remain a director, and those obligations remain unfulfilled for 30 days following your appointment,
you will be made personally liable for the outstanding tax debt(s).
As is apparent from the wording of section 269-20, new directors are afforded a 30-day period to address outstanding liabilities that existed prior to their appointment. To discharge those obligations and avoid incurring personal liability, a new director must take all steps reasonably necessary to do one of the following:
- pay the outstanding tax liability(s);
- appoint an administrator to the Company under s 436A, 436B, or 436C of the Corporations Act 2001;
- appoint a small business restructuring practitioner under s 453B of the Corporations Act 2001; or
- appoint a liquidator to the Company.
Alternatively, if the director can show that it was impossible to take the necessary steps to achieve any of the aforementioned options, then the director can avoid personal liability.[1] That impossibility must have persisted from the moment the obligation crystallised, to the expiry of the relevant director penalty notice in order to constitute a valid defence.[2]
General Defences
The TAA 1953 provides limited defences to proceedings brought under the DPN scheme. One defence commonly raised is where it would be unreasonable to expect a director to take part in the management of the company during the relevant period due to illness or another “good reason.”[3]
The scope of this defence was explored in Deputy Commissioner of Taxation v George (2002).[4] It was found that isolated instances where the director could not have participated in managing the company’s affairs did not constitute a sufficient defence of “good reason”. The director must have been unable to participate for the entire period during which they were under obligation.[5]
In Deputy Commissioner of Taxation v Roche (2014) the respondent director claimed that his participation in managing the company was limited to brief discussions and a broad review of cash-flow projections. The Master rejected the notion that his lack of involvement with company affairs deprived him of any opportunity to address the penalty, stating:[6]
“Clearly then he knew little of what was happening and how the company was placed financially. He appears to have been what is sometimes called a ‘sleeping director’. Being a sleeping director is a very dangerous pastime.”
Most importantly, case law makes it clear that a director’s reliance on another person (for example, an accountant or specially appointed financial officer) is not a sufficient defence – a director must always be aware of the company’s financial position at all times.
Resignation?
Resignation will not protect a director from incurring liability under the director penalty regime. The courts have confirmed that liability arises if a person was a director at any time during the period leading up to the due date of the relevant tax obligation, even if they resigned before that date.[7] A director who steps down instead of taking action to address outstanding liabilities will not avoid exposure to a director penalty and will have forgone the ability to compel the company to act on the debt amount.
Key Takeaways
Australia’s director penalty regime imposes strict obligations on company directors, including those who have only recently taken up their role. The regime rewards vigilance and diligence, ultimately encouraging active oversight of corporate taxation commitments.
For newly appointed directors, the first 30 days after appointment are critical in ascertaining the company’s financial situation and the existence of any outstanding taxation liabilities. Promptly addressing any such liabilities is essential to avoid incurring personal liability.
[1] Tax Administration Act 1953 (Cth) s 269-35(2)(b).
[2] Deputy Commissioner of Taxation v George [2002] 55 NSWLR 511.
[3] Tax Administration Act 1953 (Cth) s 269-35.
[4] Deputy Commissioner of Taxation v George (2002) 55 NSWLR 511.
[5] Ibid at 517 [21]-[26].
[6] Deputy Commissioner of Taxation v Roche [2014] WASC 222 at 38.
[7] Canty v Deputy Commissioner of Taxation [2005] NSWCA 84 [25].