Director Penalty Notices are an extremely powerful and effective tax debt collection tool available only to the Australian Taxation Office (ATO). The ATO commonly use the Director Penalty Notices to collect outstanding tax debts. If a Director Penalty Notice is not compiled with the company director will become personally liable for the outstanding tax debt listed in the notice.
For this reason, it is essential that company directors act promptly if they receive a Director Penalty Notice for tax debt. You must act with 14 days of the date of the Director Penalty Notice so you cant delay!
Whilst you must act quickly, you must also carefully consider your options regarding any tax debt. The Director Penalty Notice provides you with three (3) options. Whilst paying the debt may appear to be the easiest and most straightforward option (assuming the company has sufficient funds to do so) we will explain below how it can in some circumstances result in a larger personal liability in the future.
How the Notices work?
If a company falls behind in its payment of tax debts, the ATO can issue a Director Penalty Notice to any or all of the directors. The Director Penalty Notice takes the form of a letter from the ATO.
Once a Director Penalty Notice has been received, company directors have fourteen (14) days to implement one of four alternatives:
- Pay the tax debt in full; or
- Implement an installment payment agreement to pay the tax debt to the ATO; or
- Ensure that the company has been placed into liquidation (within the 14 day period); or
- Place the company in Voluntary Administration (within the 14 day period).
If one of these four outcomes is not achieved within the fourteen (14) day period, then the Income Tax Assessment Act imposes personal liability on directors for the amount of the tax debt as set out in the notice.