The tax risks of becoming a company director?

Many company directors are aware that they can be held personally liable for the debts of a company if they have given a personal guarantee or if they allow the company to trade whilst insolvent. However many directors are unaware of the circumstances in which they can be made personally liable for the company’s tax liabilities.

Risk of breaching directors duties if taxes are not paid

Directors have an obligation to act in good faith, in the best interests of the company and to act with reasonable care and diligence. Ensuring that a company’s tax affairs are managed diligently forms a part of this obligation.
A director must ensure that their company complies with its tax payment obligations as failure to do so can result in the director being in breach of their duties as a director. A breach of this duty may attract penalties under the corporations act of which the director may be held personally liable. These can include civil penalties criminal charges and compensation.

Risk of personal liability under Director Penalty Notices

Under division 269 of schedule 1 of the Taxation Administration Act 1953, directors are required to ensure that the company complies with its PAYG withholding and superannuation obligations. If a director fails to ensure compliance with these provisions the Commissioner of Taxation can recover from a director a penalty equal to the company’s outstanding PAYG and superannuation debts.

The director’s penalty notices regime allows the ATO to impose a personal penalty on a director who failed to ensure that a company complies with its PAYG withholding and superannuation obligations. If a company has outstanding PAYG superannuation debt then the ATO can send a director’s penalty notice to a director giving that director 21 days to;

• Cause the company to pay the debt;
• Put the company into liquidation;
• Put the company to voluntary administration;
• Come to a payment arrangement with the ATO

Risk of personal liability for unpaid GST

Legislative amendments that have been recently proposed may result in directors being exposed to personal liability for unpaid GST. The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 introduced into Parliament in 2019 will, if enacted, allow the ATO to collect estimates of anticipated GST liabilities from company directors personally in certain circumstances. The amendments will allow the ATO to collect unpaid GST from directors in the same way as PAYG withholding and SGC can be recovered, as discussed above. Directors should keep an eye on the progress of this proposed legislation.

Risk of personal liability for tax debts incurred while insolvent

Directors can be personally liable for debts incurred by a company where the company trades while insolvent. This is because one of the fundamental duties of a director is to ensure that the company does not trade while it is insolvent. If a company is unable to pay its debts as and when they fall due the company is insolvent. This can include tax liabilities incurred by the company while trading insolvent.

Risk of personal liability as a Public Officer

A company carrying on business in Australia is obliged to appoint a “public officer” to act as the company’s representative and official point of contact for the ATO.
A public officer must be appointed by the company within three months of the company commencing business in Australia or deriving income from property in Australia. It is an offence to fail to appoint a public officer. There must always be a person who holds the position of public officer.
Generally, the board of directors will choose who is appointed as a public officer. The power will normally be contained in the company’s constitution.
The public officer must ensure that the company meets its obligations under the ITAA, and they can be held liable for penalties which are imposed on the company for failing to comply with the ITAA. Similar provisions are found in the SGAA.