Changes to the ATO director penalty notice regime

The Federal Government’s 2011 Budget which was handed down in May 2011, included proposed amendments to the powers of the Australian Taxation Office (“ATO”) in regard to their ability to hold directors of companies with a poor compliance history personally liable for the company’s unpaid Pay as You Go Withholding (“PAYGW”) and Superannuation Guarantee Charge (“SGC”) obligations, through the Director Penalty Notice (“DPN”) regime.

The legislation (The Tax Laws Amendment (2012 Measures No. 2) Bill 2012) amending the DPN regime has now passed through both houses of Parliament (it passed through the Senate on 27 June 2012) and is awaiting Royal Assent. Royal Assent normally takes between 7 to 10 working days, but as this legislation has been in the pipeline for more than a year, it would not be surprising if it was fast tracked.

What are the changes?

Under the existing DPN regime, once the ATO has issued a DPN, a personal liability can be created for a company’s director in respect to unpaid PAYGW, should the company fail to do one of the following within 21 days of the issue of the DPN:

1. Pay the outstanding amounts to the ATO; or
2. Appoint a voluntary administrator to the company; or
3. Appoint a liquidator to the company.

Some of the major changes to the DPN regime are summarised hereunder:

• Make directors personally liable for their company's failure to pay employees' superannuation by the inclusion of amounts owing under the SGC in the DPN regime. The ‘new’ personal liability of directors for SGC will apply to SGC for which the lodgment date arises after the date of Royal Assent. Outstanding SGC at the date of Royal Assent will not be caught by the ‘retrospective’ application of the new legislation;
• Enable the ATO to make a reasonable estimate of unpaid SGC where a company fails to meet its reporting obligations;
• Allow the ATO to commence recovery procedures where a company fails to comply with its reporting obligations for a period of more than 3 months and its PAYGW and/or SGC liability remains unpaid. In this circumstance, the ATO will still be required to issue a DPN to directors of the company, however the director’s penalty will not be remitted by placing the company into voluntary administration or liquidation.
• Once Royal Assent is granted, personal liability for PAYGW debts existing at that date which have been unreported and unpaid for more than 3 months cannot be extinguished by the appointment of a voluntary administrator or liquidator. Nor will the lodgment of the outstanding Business Activity Statement remit the penalty for PAYGW which was unreported for 3 months or more; and
• Restriction of access for directors and certain associates to PAYGW credits where the company has failed to remit PAYG to the ATO. Rather than disallowing a credit to the taxpayer for his/her PAYGW entitlement (as was originally proposed), the recovery mechanism will now be via the imposition of a PAYGW non-compliance tax on a relevant director or associate. The ATO cannot recover the PAYGW non-compliance tax unless a notice is first issued to the individual director or associate, and a notice cannot be issued on a director who has a director penalty liability.