Director penalty notices explained: what directors need to know

Why the regime exists

Companies collect PAYG withholding from employees’ wages and, in many cases, GST from customers. That money is held on trust for the ATO in a practical sense. Super guarantee contributions belong to employees. When a company fails to pass these amounts on, the ATO can look past the company to the people who run it. The director penalty regime is the mechanism that lets it do so.

This guide is general information, not legal or tax advice. If you have received a notice, speak to your accountant, a lawyer or an insolvency professional straight away.

Which amounts can be covered

The regime covers unpaid PAYG withholding, unpaid super guarantee charge and, in certain circumstances, GST. These are the amounts that most often build up in a business under cash flow pressure, because they sit in the operating account until they are due. If your company has an ATO balance made up of these items, the directors may already have exposure even before any notice arrives.

Standard versus lockdown notices

The most important distinction is whether the company reported its obligations on time. If amounts were reported by the required deadline but not paid, a standard notice typically gives directors a short window to take one of several actions: pay the debt, appoint a voluntary administrator, appoint a small business restructuring practitioner, or place the company into liquidation. Taking one of those steps within the period can remit the penalty.

If amounts were not reported within the required time after their due date, a lockdown notice may apply. The options to remit the penalty narrow sharply and paying the debt is generally the main way to remove personal liability. This is why lodging BAS and super reports on time matters so much, even when the company cannot pay.

The deadline is real

Notices come with strict timeframes, and the clock starts from when the notice is issued, not when you happen to read it. Directors who travel, change address or let mail pile up can lose valuable days. Check the date on the notice, diarise the deadline and act immediately.

How finance can help

If the company is viable and the problem is a tax debt that built up during a difficult period, paying the debt within the notice period protects directors and keeps the company trading. The fastest route is usually property-secured finance. A caveat or second mortgage over property owned by a director or related party can be assessed without a valuation before approval and can fund in as little as 24 hours on straightforward deals once documents are signed. Interest can be prepaid or capitalised, so the business does not carry a new monthly repayment straight after clearing the ATO. See director penalty notice finance.

When finance is not the answer

If the company cannot realistically pay its debts as they fall due, borrowing to clear a notice may only move the problem onto the directors’ property. In that case, an administrator, a small business restructuring practitioner or other professional advice may be the better path. A good lender will ask hard questions about viability before lending, and you should ask them of yourself first.

Preventing the next notice

• Lodge every BAS and super report on time, even when you cannot pay.
• Move PAYG withholding and GST into a separate account each week.
• Pay super on time; the super guarantee charge is not tax deductible.
• Talk to the ATO early if you are falling behind.
• Review the company’s tax position monthly, not quarterly.

Our guide to GST and BAS cash flow planning sets out a practical system.

Directors who were not hands-on

Some directors are surprised to find themselves exposed for debts they did not personally manage, for example a spouse or business partner who held a directorship but left the books to someone else. The regime applies to directors generally, which is why every director should understand the company’s tax position and insist on regular reporting. If you are a director in name only, that is a reason to become informed, not a defence to rely on.

An illustrative example

The two directors of a small manufacturing company received a standard notice covering unpaid PAYG withholding that had built up while a major customer paid late. The company had lodged on time. With advice from their accountant, they used a caveat loan over one director’s home to pay the amount within the notice period. The company kept trading, and the customer’s late payment repaid the loan a few months later.

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