Directors Personal Liability for PAYG Withholding Tax

While the Australian Taxation Office (ATO) continues its low-key approach to policing GST it is pursuing arrears of Pay As You Go (PAYG) withholding tax with increasing vigour. Until the early nineties, the ATO enjoyed priority status over ordinary unsecured creditors for arrears of PAYG withholding tax in a company liquidation or receivership. The ATO lost this priority when the Corporations Act was amended – in place of this it was granted a short-cut method to hold the directors of a company personally liable to arrears in PAYG withholding tax. This is actioned through service on each of the corporation’s directors of a notice under s222AOE of the ITAA. These notices require that the directors cause their company to do one of four things:

1. Pay the tax within 14 days

2. Make a payment agreement with the Deputy Commissioner of Taxation;

3. Wind up the company; or

4. Place the company into voluntary administration.

Pay the Tax

A company that has not been remitting its PAYG withholding tax invariably has other cash flow pressures. On a practical level (and leaving questions of insolvent trading aside) if the directors know that the company would be able to make payment shortly after the 14 days, then personal liability is less of an issue. However, should the company go into liquidation within 6 months of the payment, then it is possible that a liquidation might overturn and recover the payment as a preference. If the payment was made after the 14-day deadline then the ATO could then turn to the directors and pursue them for the debt.

Payment Agreements

There have been instances of the directors relying on continuing dialogue with the ATO on the understanding that because they are in negotiations the 14-day period has been waived. If the 14 days lapse during these negotiations, then the directors are personally liable for the PAYG withholding tax. If you are advised by the ATO that an extension of time has been granted to ensure that it is in writing and received before the expiry of the 14 days.

The ATO have little interest in protracted repayment arrangements and seek a substantial immediate contribution with the balance paid in the not too distant future. If there are other classes of tax outstanding they will be even less likely to accept delayed repayment. If default occurs under the terms of the repayment arrangement, then the directors are personally liable for any amounts still outstanding under the original notice. It is also important to ensure that all payments made under a debt arrangement are clearly marked as being for that purpose. It is of no help to the directors for that purpose. It is of no help to the directors later if it is established that subsequent payments have been allocated to other arrears and not PAYG withholding tax.

Wind up the Company

To remove the personal liability for arrears of PAYG withholding tax the directors can cause the company to be put into liquidation. The company must be in liquidation within 14 days. As a voluntary liquidation would take about a month to institute and court appointed liquidations take about the same time, then this option is not really available to most companies. Appointing a provisional liquidator is not sufficient.

Place the Company into Voluntary Administration

Directors usually opt for voluntary administration as the appointment can occur on the day, or at least the next day, after approaching the potential administrator. When there is a core business worth preserving then a voluntary administration will usually be the preferred option. This puts a moratorium on all creditors actions and allows the directors time to consider whether the company can be restructured and / or whether a repayment proposal should be put to creditors.

No other class of creditor has the right to lift the corporate veil so easily and Section 222AOE notices should not be treated lightly. If you receive these notices please contact us urgently so we can offer advise on the best course of action to avoid personal liability that accrues under these notices.