The new Director Penalty Regime

The new Director Penalty Regime came into place in June 2012. It once and for all clears up any suggestion that a director can have a passive involvement in a company.

It provides a stern warning to company directors that this position has great responsibilities. Unless directors closely monitor their company’s activity, they are placing themselves at great risk.

Companies, as a legal entity, have long been a preferred structure for new business ventures because it provides protection of personal assets of directors.

As a separate legal entity, if things go bad in the business, it is the company that is responsible not the directors personally. However, there are exceptions to this general principle. For instance, when a director seriously breaches their legal duties as a director, or allows the company to trade whilst insolvent, they may be personally attacked.

The new rules go a lot further. Under the new regime, a director will be personally liable for any PAYG withholding tax and employee superannuation if they are not paid or reported within three months from their due date. This liability remains even if the company is later put into administration or liquidation.

Company directors must be fully aware of the financial position of their company. This means taking all reasonable steps to ensure that the company does not incur financial commitments that the company cannot afford. Relying solely on the word of the financial controller will no longer be an excuse.

With the change in law, company directors must ensure that PAYG withholding tax and employees superannuation are paid when due or are adequately reported to the ATO. That means lodging business activity and superannuation guarantee charge statements on time.

The new Director Penalty Regime highlights the serious obligation and risk as a result of being a company director. If in doubt about your obligations, or the financial standing of a company, you have the option of getting legal and financial advice. Like so many other things in business, early advice is usually the best.