Personal Liability for Tax Debts
It is a common misconception that directors are automatically personally liable for the tax debts of a company. That is not the case. However, it is possible, and fairly common, for a director to become personally liable for a company’s tax debts.
So the starting point is that company’s tax debts are a debt of the company and not a debt of the director.
- But, the Tax Act states that a director becomes personally liable for PAYG deductions if those deductions are not paid to the ATO, but, that liability is only enforceable if the ATO sends a Director Penalty Notice (“DPN”) to a director which gives the director 21 days to take various actions. So in practice there is no automatic personal liability, but rather, a director will only be liable if he or she receives a DPN and fails to act within a 21 day period.
- Also, new legislation came into effect in June 2012. The new legislation introduced a clause to say if a company has not paid or reported its PAYG or Superannuation Guarantee debts within 3 months of the due date, then a director is personally liable for those company tax debts. This new type of DPN is commonly called a “Lockdown DPN”.
The message for directors is that you are not automatically liable for a company’s tax debts but if you either fail to respond to some tax Notices or if you are late with lodging company tax returns then you can be made personally liable.
Please see our other page that deal with Director Penalty Notices.