Director's Liability

There are many pieces of legislation in Australia where a director has some degree of personal liability. The past decades have seen an increase in the prevalence of such legislation affecting directors’ liability.   Problems for company directors usually fall into a handful of liability traps such as personal guarantees, director penalty notices (DPNs), indemnity provisions to the Australian Taxation Office (ATO), insolvent trading, director loan accounts and the blurring of lines between a director’s and a company’s finances. The most common cause of personal liability is self-inflicted in the form of personal guarantees.

If Directors become personally liable
How long since your business conducted a health check on its finances?  Are you at risk of personal liability or even criminal penalty?
Many Directors do not appreciate that they can be made personally liable for:
  • Unpaid PAYG or SGC debts – Directors become personally liable for the company’s PAYG and Super Guarantee Charge debts if those debts remain unpaid and unreported for three months or more after the due date. Directors cannot discharge this liability by placing the company into liquidation or administration.
  • Debts incurred by the company at a time when the company was insolvent.
Also, you may be liable to criminal penalties as a Director if they breach the provisions of the Corporations Act 2001; if they fail to act with due care and diligence and in good faith or even use their position for financial personal gain or someone else or cause detriment to the company.

When the ATO comes collecting debts
The ATO has become very active in collecting debts from a small business over recent years. The ATO is actively using:
  • Garnishee notices to secure payments for outstanding tax direct from your bank account or the customers who owe you money.
  • Director penalty notices for unpaid PAYG and SGC debts.
  • Taking security over assets of a taxpayer to protect the outstanding taxation debt, in some circumstances where the taxpayer:
    • Is taking steps to file an objection to the assessment
    • Has limited income but reasonable value of personal assets
    • Is an entrepreneur who may have overreached during their start-up phase and now has limited cashflow
    • Has neglected their taxation obligations during the start-up period whilst accumulating significant personal wealth and now does not have sufficient cashflow to pay their entire tax liability
 
And now the ATO has a new weapon
The ATO now has a new weapon in its armoury that has the potential to substantially impact the ongoing operations of a business. Beware they can now disclose the tax debt to credit reporting bureaus.

It was in December 2016, the Treasurer, Scott Morrison, announced that from 1 July 2017 the Government will allow the ATO to disclose to credit reporting bureaus the tax debt information of businesses that have not effectively engaged with the ATO to manage these debts. This measure will initially only apply to businesses with an ABN and who have a tax debt greater than $10,000 that is at least 90 days overdue.

This is despite many suppliers that have unpaid invoices when their customers enter into external administration yet knowing the customer had significant unpaid tax liabilities they would have never extended credit terms for the supply of their goods or services. 

Whilst a supplier can run an independent credit check on a prospective customer before choosing to offer credit or extend credit terms, there was, prior to the Treasurer’s announcement, no way of determining from those checks the tax debts that may be outstanding or now paid.

For businesses, this announcement means there is a real importance that will be placed on effective engagement with the ATO in relation to unpaid tax debts. If directors chose to ignore the warnings from the ATO, directors will run the risk of firmer action being commenced which could result in:
  • A notification to credit reporting agencies which will have far reaching impacts on the ability of the business to obtain finance and secure credit terms with suppliers.
  • Personal liability for unpaid PAYG and SGC
In summary, the ATO is often willing to work with any business to agree on reasonable terms to repay tax debts in a manner that will permit the business to maintain sufficient cashflow to enable it to continue to trade.