BEWARE! DIRECTORS PENALTY NOTICES
01 03 2006
The ATO in 1993 surrendered their right to any dividend priority in corporate insolvency administrations on the basis that they obtained the ability to make directors, in certain circumstances, personally liable for a company’s outstanding tax obligations.
This ‘trade-off” resulted in the establishment of Section 222AOE Notices under the Income Tax Assessment Act (or more commonly referred to as Director’s Penalty Notices) exposing a director personally for a company’s failure to remit tax installments and other deductions (eg. PAYG). Pursuant to Section 222AOE, the ATO is not entitled to recover the company’s unpaid taxes from the director personally until the expiry of a 14 day notice period.
The ATO also has the power to make estimates after the due date for payment and when a return has not been lodged. Given the harsh personal consequences, it is therefore essential that an accounting practice, who may receive this notice from the ATO on behalf of their client (eg. as a result of being the Registered Office) is fully aware of the serious implications to their client personally from the receipt of same.
Given that the Section 222AOE Notice has an “action” period of only 14 days to avoid personal liability of the director, it is essential that steps are taken immediately by the accountant to notify their client of this notice and the implications thereof.
We have seen instances where the Section 222AOE Notice has not been immediately referred onto the client by the Tax Agent and on the expiry of 14 days the director has become personally liable for the tax debts of the company.
For the penalty to the director (not the debt of the company) to be remitted in full (thus avoiding personal liability), the director must cause the company, within 14 days of the notice, to do one of four (4) alternatives:
- To discharge the liability;
- Have in force an agreement relating to the liability under Section 222ALA;
- Appoint a Voluntary Administrator to the company; or
- Wind Up the company.
Statutory defences are however available to a director, including because of illness (or some other good reason) the director did not take part in the management of the company at the time the remittance was due, the director took all reasonable steps to cause the company to comply or no such steps could have been taken.