Avoiding double director’s penalties!


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Avoiding double director’s penalties!

A director of a company is responsible for carrying out certain necessary activities, including statutory duties, preparation of accounts and reports etc.  Failing to do so may result in the director being held personally responsible and being issued with a Director Penalty Notice (DPN).

It is now even easier for directors to receive one.  From 29 June 2012, due to the strengthening of the ATO’s powers under the DPN regime, non-lodgement of BAS and Superannuation Guarantee Charge (SGC) statements will see directors being held responsible, with no amount of good intention or plea of ignorance being grounds for waiving.

Further, GST became subject to the Director Penalty Notice regime from 1 April 2020.  Information in relation to this can be found in our previous article:  Director Penalty Notice regime

Did you know?

  1. New directors: Before taking over as a director of a company, it is imperative that directors check for any unpaid PAYG withholdings, GST or SGC.  If they don’t, and there are outstanding debts, they may become personally liable for these debts and any penalties.
  2. Insolvent: If a company continues to trade whilst insolvent, any debts that were incurred during this time will become the personal liability of the director.  Note:  a DPN can be issued at any time before or even after a Liquidator is appointed.
  3. Previous director: It can be years in the future that a director can receive a DPN and be personally liable for debt incurred before and during the time they were a director.
  4. Double Director Penalty: If a DPN is ignored and the matter is not handled correctly, a director can actually be hit with a double penalty.

Here is a case study of how this can happen and how you can avoid it happening:

Case Study – George

George is the director of a company that has the below creditors:

  • $80,000 for superannuation;
  • $48,500 for unrelated employee leave entitlements;
  • $10,000 Director’s leave entitlements; and
  • $300,000 for income tax.

George received a Director’s Penalty Notice (DPN) making him personally liable for the company’s superannuation debt of $80,000.

The following two paths are available for George.  Further details are provided following the options.

Option 1 – Neglectful Approach

After several months, the DPN remains unpaid and the Australian Taxation Office (ATO) transfers $80,000 from George’s personal income tax refund to meet the company’s liability.

The ATO wind up the company and a Liquidator is appointed by the Court.

The Liquidator recovers a preference payment of $50,000.
The ATO enforces their indemnity for the recovered preference payment against the director.
The director is required to pay $50,000 to the ATO.

The Distribution:

There is no superannuation liability as this was paid through a DPN.
Funds available for distribution: $50,000

The Liquidator pays a distribution as follows:

  • $30,000 for Liquidator fees;
  • $19,400 for employee leave entitlements being 40% of $48,500; and
  • $600 for the director’s leave entitlements as an Excluded Employee being 40% of the $1,500 cap.

The director’s net position

The director has personally lost $80,000 from the DPN.
He has also lost $50,000 for the preference payment indemnity; and
He has received $600 from the Liquidator for leave entitlements.
The director has an unsecured non-priority claim of $80,000 however there are insufficient funds to enable a distribution to non-priority creditors.              
            

       arrow picture  A net loss of $129,400                    

Option 2 – Pro-active approach:

George approaches dVT Group and based on their advice voluntarily appoints a Liquidator to his company.

George provides the Liquidator with $80,000 to meet the company’s outstanding Superannuation liability.  This clears the DPN with the ATO.

As George has approached a Liquidator early, the business is sold for $100,000.

The Liquidator recovers a preference payment of $50,000.
The ATO enforces their indemnity for the recovered preference payment against the director. The director is required to pay $50,000 to the ATO.

The Distribution:

After previously paying the ATO a distribution of $80,000 using the funds advanced from the director, the Liquidator pays a second and final distribution as follows:

Funds available for distribution: $150,000

  • $30,000 for Liquidator fees;
  • $80,000 to George priority subrogated creditor for the funds advanced for Superannuation;
  • $29,100 for employee leave entitlements being 60% of $48,500; and
  • $900 for the director’s leave entitlements as an Excluded Employee being 60% of the $1,500 cap.

The director’s net position

The Liquidator repaid their initial $80,000 advance for superannuation in a distribution from the Liquidator.
The director has personally lost $50,000 for the preference payment indemnity and
He received $900 from the Liquidator for leave entitlements.

        arrow picture   A net loss of $49,100 (being $80,300 better off than Option 1)

In summary

Obviously, DPNs should be avoided by meeting statutory obligations and covering liabilities, however in the event that one is received, directors should contact their accountant or a trusted insolvency practitioner to receive advice, as this can avoid the situation becoming worse and the director losing more personal money and/or assets.

If you would like to more about DPN’s and what the best course of action to take should you receive one, please contact Luke Coppin at dVT Group on (02) 9633 3333 or by email lcoppin@dvtgroup.com.au.  

Definitions

What is a DPN?

A DPN is a penalty issued by the ATO that makes a director personally liable for the company’s taxation liabilities. These include GST, PAYG and Superannuation debts.

Director’s indemnity for recovered preference payment

When a Liquidator recovers an unfair preference payment from the ATO, the ATO is entitled to an indemnity against the director (section 588FGA of the Corporations Act). This makes the director personally liable for the amount the ATO had to repay to the Liquidator.

Who are Priority Creditors?

Section 556 of the Corporations Act lists the priority of creditors in a distribution in a Liquidation.  Superannuation is afforded a priority over unsecured creditors by Section 556(1)e.

Who are Excluded Employees?

Directors and their relatives are defined as Excluded Employees in Section 556(2) of the Corporations Act. Section 556(1B) of the Corporations Act limits the amount that can be paid as a priority distribution to $1,500. The balance will rank equally with other non-priority creditors.

What is Subrogation?

Section 560 of the Corporations Act (provides that “the person by whom the money was advanced has the same rights under this Chapter as a creditor of the company”. This allows for a director to advance money to pay out a creditor and then stand in the shoes of that creditor for any distribution.