PAYG Withholding tax debts

msi - ATO#1By David Ferguson, MSI Ragg Weir, Melbourne.

Under current income tax laws, the Australian Taxation Office (ATO) can hold a director of a company personally liable for unpaid employee PAYG withholding tax debts of a company as well as employee superannuation.

In order to hold the director personally liable the ATO must follow certain procedures and firstly issue a Director Penalty Notice to the director(s).

Where a Director Penalty Notice is issued, it may apply differently under the two scenarios described below.

Where all Business Activity Statement (BAS) lodgments are up to date

If the ATO issues a Director Penalty Notice in circumstances where all BAS returns are up to date, even where there is unpaid PAYG debts, the directors will be allowed a 21 days grace period in which to comply with the notice and thereby avoid personal liability for the outstanding debts of the company. Compliance with the notice can comprise doing one of the following within the 21 day grace period:

  • paying the debt;
  • appointing a liquidator; or
  • appointing an administrator.

Failure to comply leads to the director(s) personal liability for the company’s tax debt.

Where BAS lodgments are outstanding more than 3 months past the due date

If the ATO issues a Director Penalty Notice in circumstances where BAS lodgments have not been made within 3 months of the due date, the directors will not be allowed any period of grace and will be automatically personally liable as soon as the notice is issued for the unpaid debt of the company. This means that directors will not be able to avoid personal liability for company debts by placing a company into liquidation or administration. The tax debt must therefore be paid to avoid director personal liability.

In situations where lodgments are not up to date the ATO can issue estimates of what they believe may be the debt of a company and can then issue a Director Penalty Notice based on those estimates.

If company directors are in any doubt about the above rules, they should seek advice from their local MSI advisor.

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