Once upon a time, directors were not subject to the risk of personal responsibility for company debts. That left directors exposed to insufficient accountability, and the pendulum has been made to swing back over time. The pendulum is now on the move again – in the same direction.
Your company’s PAYG and superannuation debt is your debt
The Director Penalty Notice (DPN) regime was introduced a few years ago. Directors of a company (including trustee companies) can be made personally liable, by way of a DPN being issued to them, for their company’s unpaid Pay As You Go (PAYG) withholding and Superannuation Guarantee Charge (SGC).
PAYG withholding is part of a business’s wages cost, and employee superannuation was never meant to be an additional cost for business, but rather an income sacrifice by employees. So, whilst these obligations are part of business-as-usual costs, there’s a time delay between paying the after-tax wages to employees, and paying the PAYG withholding to the ATO and the superannuation to the employee’s superannuation fund. But if you find yourself having to rely on that delay in managing your cashflow, that’s a clear indicator that your business has a cashflow problem.
…and now GST as well
Swinging the pendulum even more, a Bill before Parliament will extend DPNs to a company’s net GST liability (as well as Luxury Car Tax and Wine Equalisation Tax). These represent funds collected from your customers that are best viewed as not being your company’s money, and merely held for passing on to the ATO.
It's likely the Bill will become law, and that will mean if your company has not paid its GST liability, you’ll now be on the hook for it personally.
Yes, it’s that simple
It’s as simple as that – if your company hasn’t paid its GST liability by the due date, you automatically become liable for it personally, full stop. For most businesses, the GST liability and PAYG withholding comprise a big chunk of the net amount payable on each monthly or quarterly Business Activity Statement (BAS) – and you’re on the hook for it personally, every month or quarter.
Take a moment to let that sink in. If we haven’t already, perhaps it’s time for a discussion about your personal asset protection.
Once the due date passes, and thus your personal exposure as a director is triggered, it’s open for the ATO to issue a DPN to you, which is basically advance notice of pursuing you for the unpaid amount. You then have a 21-day window to do something – ignoring a DPN is truly not an option. Even if you haven’t lodged a particular BAS, the ATO has the power to estimate the liability.
Prevention is better than a cure
Let’s skip to prevention, to save you having to read the rest of this article:
- Ensure BASs are lodged, and the net liability paid, by the due date.
- Even if your company is unable to pay the liability, lodge the BAS on time.
- If the BAS won’t be ready on time, seek an extension to the lodgement date.
- If the full liability will not be paid on time, talk to us at Nexia.
- Your trusted Nexia advisor can help, including:
- Negotiate payment arrangements with the ATO.
- Help you with improving your cashflow management and/or freeing up cash.
- Review whether or your circumstances optimise personal asset protection.
The purpose of DPNs is to hold directors to account who are ignoring their responsibilities. If you are genuinely engaging with the ATO on managing your company’s unpaid GST, PAYG withholding and SGC obligations, it’s unlikely that you’ll be issued with a DPN.
Read on if you wish, but you shouldn’t need to
If you are following the above guidance, you’d have no need to read any further. But hey, if you’re curious, there are two types of DPNs – non-lockdown and lockdown. The consequences of each are different, and you can probably guess which one is worse.
Firstly, there is the “lockdown date”, which is three months after the due date for payment of GST and/or PAYG withholding. For example, a company’s BAS for the September quarter was due for lodgement on 28 October, as was payment of the GST and PAYG withholding. The lockdown date for the September BAS is therefore three months later – 28 January.
If the September BAS is lodged within this three-month grace period – by 28 January – a DPN issued in relation to the relevant unpaid GST or PAYG withholding liability is a non-lockdown DPN. This means certain actions – provided undertaken within that 21-day window – will result in the DPN being cancelled. These are:
- The company paying the outstanding liability; or
- The company is put into voluntary administration or liquidation.
If the September BAS is lodged after 28 January, any DPN issued is a lockdown DPN. This means there is nothing anyone can do that will result in the DPN being cancelled – the director is stuck with it, and will be pursued for payment. Where a director pays a DPN liability, a right of indemnity arises against the company and fellow directors (for whatever that might be worth).
There is one difference with SGC, and it’s that there is no grace period for late lodgement of a SGC statement. If you have not paid your employees’ quarterly superannuation by the due date, you must lodge a SGC statement within one further month. If the SGC statement is lodged even one day late, any DPN subsequently issued in relation to the unpaid SGC is a lockdown DPN.
Some limited defences against a DPN liability are available, such as being unable to take part in the company’s management due to illness.
Summary
The whole point of DPNs is to not have one issued to you. Which brings us back to the part above under Prevention is better than a cure.
If you wish to discuss further, talk to your trusted Nexia advisor.
