If a corporate employer does not pay (or short pays) PAYG withholding to the ATO by the due date, its directors may become personally liable for these sums. Similarly, if a superannuation guarantee (SG) charge liability is owed by the company because it did not pay (or short paid) SG contributions by the due date, the directors may become personally liable for this debt.

How will the ATO make the director liable?

The ATO makes the director personally liable for the debt by issuing a director penalty notice (DPN). If a director receives a DPN, they will need to act within 21 days of the issue date.

The action depends on whether the DPN is a lockdown or non-lockdown penalty notice. The latter is issued when the company lodges activity statements within 3 months of the due date, or lodges SG charge statements within 1 month of the due date, but the debt is not paid. If the company does not pay this debt, the ATO can issue DPNs on the directors. The directors can decide to either pay the debt in full or take steps to have the company treated as insolvent, e.g. appoint an administrator.

For a lockdown penalty notice, where the company has not notified the ATO of its debt within the required timeframes and made no payments of its liabilities, the only option the director has upon receipt of a DPN is to pay the debt in full. This can be done by agreement to pay through a payment arrangement over time.

During the pandemic, the ATO took a lenient approach to debt. However, the ATO collectable debt has increased 89% from $26.5 billion in June 2019 to $50.2 billion in June 2023. The ATO is now taking a firm approach. Since July 2022, more than 24,000 DPNs have been issued in respect to more than 18,000 companies.

A DPN can be issued to an ex-director if the debt was incurred during their directorship.

Defences against a DPN

If, because of illness or for some other good reason, it would have been unreasonable for the director to take part in the management of the business, they may have a defence to the DPN. The illness may be of close family of the director, provided it prevented the director from being able to participate in the company’s business.

The director may also have a defence against the DPN if they took all reasonable steps to ensure the company complied with its tax obligations, or took appropriate action in response to the company’s insolvency, e.g. commenced winding up.

If the liability resulted from the company taking reasonable care to apply the Superannuation Guarantee (Administration) Act 1992 to a work situation in a way that was reasonably arguable, a director will have a defence to any DPN issued to them as a result of that application. The classification of a worker as an employee, deemed employee (i.e. working under a contract wholly or principally for their labour) or contractor is the type of matter that would frequently fall into this category. Directors should seek advice about their company’s approach in this area.

Acknowledgement: With thanks to Megan Bishop for her contribution to this bulletin.