The New ‘Director Penalty Regime’

What is the Director Penalty Regime?

The director penalty regime (DRP) is used to enforce the duties of directors through the use of penalties. The provisions of the regime are set out under Division 269 of the Tax Administration Act 1953 (Cth) (TAA 1953). Amongst other things, Div 269 outlines the directors’ obligations, penalties for failing to meet those obligations, and means of discharging liabilities in situations where penalties are enforced.

The director penalty regime imposes stringent penalties on directors whose companies breach their obligations to pay estimates of PAYG withholding liabilities to the Commissioner (Div 268), or who fail to remit amounts withheld, including from salaries/wages, dividends, interest and royalties.

What is a penalty?

For the purposes of this regime, when a company has failed to pay any PAYGW by the due date, the unpaid amount becomes a penalty.
What is the DRP’s purpose?

The purpose of these provisions is to ensure that a company either meets its obligations to pay withheld amounts to the Commissioner (as per Subdivision 16-B and Div 268), or goes promptly into voluntary administration under the Corporations Act 2001 (Cth) or into liquidation.

What was the existing penalty regime?

Under the pre-existing DRP, the penalty provisions were set out in Subdivision 269-B. However, it should be noted that directors may also be subject to penalties under other provisions of the TAA 1953, as well as other legislation, including prosecution for criminal offences.

Directors liable for company’s taxation offences

When a company commits a tax offence, that offence is deemed to have been committed by the director of that company. A tax offence under s 87Y TAA 1953 is not limited to directors. Liability for a tax offence committed by that company extends to any person “who is concerned in, or takes part in, the management” of a company.

There is a positive requirement on the officer of the company to prove that they were not “concerned in” or did not “take part in” the management of the company. A director or an officer will not be liable if he or she can prove that they did not aid, abet, counsel or procure the relevant act or omission to occur, and was not knowingly concerned in the company’s taxation offence.

Directors liable for corporate income tax liability

Often s 8Y is applied in conjunction with s 21B of the Crimes Act 1914, which empowers the court to make an order requiring a person who is convicted of a federal offence to make reparation payments to the Commonwealth. This power is discretionary and depends on the financial position of the individual.

In the case of Hookham v R, the appellant was the director of a company which failed to remit employee PAYE deductions to the Commissioner under the former s 221F(5)(a) Income Tax Assessment Act 1936 (Cth) (‘ITAA 1936). On appeal to the High Court, the appellant submitted that the Commonwealth had suffered loss by reason of the corporation, rather than his offence. The High Court held that the appellant was deemed to have committed the offences that the corporation committed under s 8Y, and as the offences were within the scope of s 21B, he was liable for a reparation order.

Directors’ liability to prosecution and penalties for other tax offences

In addition to being personally liable to penalties of up to $11 000, directors and officers are also punishable by custodial sentence of up to two years in respect of certain tax offences.

Directors’ personal liability to tax withheld by the company (director penalty notices)

The regime imposes a requirement on directors to ensure that the companies they represent forward moneys that are withheld to the Commissioner. Moreover, it  applies to both resident and non-resident directors of “companies” (being body corporate or other incorporated associations).

Directors who are unable to comply with this duty, or become aware that they are unable to comply, must ensure that the company enters voluntary administration or liquidation. A failure to do so will result in a monetary penalty equal to the amount of the unpaid liability being imposed on the director in his or her personal capacity.

The director penalty provisions apply to both directors holding office at the time of the non-compliance who have subsequently ceased to be directors, and to directors appointed after the time of non-compliance (if the amount remains unpaid 14 days after the appointment of the director).

  • In Canty v DCT 2005 ATC 4470 it was held that a director who resigned prior to the Commissioner issuing a director penalty notice was personally liable under (the now) s 259-15 TAA 1953.  Although it is an essential condition of a director’s liability that he or she should be in office for at least some period of time before the date on which the tax liability falls due, it is not necessary that the director should still be in office on this date.

Defences against the director penalty regime


The scope of the illness has been narrowed to prevent directors relying upon minor ailments. They must also show that in addition to having an illness, the director must not have taken part in the management of the company and it would have been unreasonable to expect the director to engage in the management of the company.

Reasonable steps

It is a defence to say that the director undertook all reasonable steps in attempting to ensure that other directors complied with their obligations or, that there were no such steps that could have been taken.

  • In Fitzgerald v DCT, an individual who was director for 17 days was liable to a director penalty because he was involved in the management of the company and his ignorance of the tax debt was not an excuse for not taking reasonable steps to ensure compliance.
  • In DCT v Saunig 2002 ATC 5135, Saunig was a director who was prosecuted for failure to remit PAYG withholding amounts. He was concerned about the competency of company management and consequently made inquiries which ascertained that the company had not remitted PAYG. Saunig then took measures to quantify the non-remittance, made certain payments in lieu of the non-remittance and, after informing his fellow directors, contacted the ATO in an attempt to resolve the matter. The Commissioner commenced proceedings against the defendant on the grounds that he had failed to cause the company to comply with its obligations The Court of Appeal held that, when considered objectively Saunig’s actions were below the standard required by a ‘reasonable director in his position’. He should have caused the company to be wound up when he knew the company was insolvent.

Limitations faced by the Commissioner under the previous DRP

Under the previously existing regime, the Commissioner’s ability to take action against such directors and companies was limited by a number of factors:

  1. Time: The Commissioner had to wait for 21 days after the director had been given notice of the penalty before issuing proceedings to recover a penalty (s 269-20 TAA 1953). During this period, the penalty could be remitted if the company stopped being under the PAYGW obligation, either by paying the mount owing, appointing an administrator or beginning to be wound up (as per the Corporations Act).
  2. Voluntary administration: Directors could avoid personal liability if he company appointed an administrator or began being wound up before receiving the notice.
  3. Claiming credits: Directors (and their associates) could continue to claim PAYGW credits through their individual tax returns even where their company had not paid those withholding amounts to the Commissioner. By not paying these PAYGW amounts, companies are potentially able to benefit from the increased levels of cash; while the directors could benefit from the tax credit they were entitled to as amounts were supposedly withheld from their remuneration. The Commissioner faced practical difficulties in establishing grounds for denying credits to directors (i.e. by showing that amounts were not withheld), particularly where a company produces a payment summary that indicates that amounts were withheld.
  4.  PAYGW obligation: The regime only applied to failures to meet PAYGW obligations, but did not provide for enforcement of other employee entitlements.

Rationale behind expanding the regime

The 2011 Federal Budget reflected the Federal Government’s focus on directors’ personal liabilities in respect of the tax obligations of the companies they represent. As such, in October 2011, they introduced the Tax Laws Amendment (2012 Measures No. 2) Bill 2012, and the Pay as You Go Withholding No-Compliance Tax Bill 2012.

Furthermore, following the Federal Court decision in Centro ([2011] FCA 717), Treasury released an exposure draft of the Personal Liability for Corporate Fault Reform Bill 2012 as the first part of the reform project.

The objective of the proposed amendments is to increase the scope for directors to be personally liable for tax failings or oversights of their companies. Thus it targets all directors, not just those who engage in ‘phoenix activity’. The Federal Government’s goal is to strengthen the existing framework between directors in their personal capacity and the tax and corporate law obligations of the companies they represent.
What is ‘Phoenix activity’?

“Phoenix activity” describes the occurrence of a company accumulating debts and then being placed into voluntary administration or liquidation in order to avoid paying those debts. The controlling entities behind the business then form a new company through which the business re-emerges, debt-free. The ATO considers this to be phoenix activity when it done in a deliberate, systematic or even cyclical way. It is important to distinguish such fraudulent behaviour (which the amendments aim to punish) from a genuine business failure.

Phoenix activity also impacts other factors in the economy:

  • As phoenix companies avoid incurring the costs of their tax debts and other obligations, they gain an unfair advantage over their competitors
  • There is an increased cost to government because revenue is los when a phoenix company’s tax obligations are not met, as well as increased costs associated with monitoring and enforcement
  • Potential environmental impacts from failure to comply with regulatory obligations

What changes have been made to Div 269?

The Tax Laws Amendment (2012 Measures No. 2) Act 2012 (Measures Act) and the Pay As You Go Withholding Non-compliance Tax Act 2012 (PAYG Act) came into effect on 29 June 2012 and counter phoenix activity as follows:

Unpaid superannuation guarantee charge

Directors are now personally liable in circumstances where their company has an unpaid superannuation guarantee charge (SGC). Penalties for unpaid SGC are imposed after the due date if the SGC has not been paid.

An SGC is usually not payable until an employer self-assesses, or the Commissioner issues an assessment (whichever is earlier). However, the amendments treat unpaid SGC as payable even if the SGC has not been assessed. This avoids difficulties arising from company directors delaying being issued penalties for unpaid amounts (from not lodging superannuation guarantee statements) where an employer has not self-assessed.

The Commissioner may make estimates of unpaid SGC and recover that amount under Div 268 of Sch 1 to the TAA 1953. This estimated amount is treated as being payable on the due date, even if the SGC has not been assessed (avoids the delay of waiting for the assessment to be issued). It is possible for a director to file a statutory declaration or affidavit for the purpose of reducing or revoking the stated superannuation obligation (s 268-40 and 268-90(2A) TAA 1953).


Where a company has applied the Superannuation Guarantee (Administration) Act 1992 (Cth) in a way that was reasonably arguable, and took reasonable care in applying that Act to the circumstances. This addresses situations where a company reasonably thought a worker was a contractor, not an employee and thus superannuation was not payable (s 269-30 TAA 1953).

Remission of penalties

Directors are now prevented from having their penalties remitted by placing their company into administration or liquidation when the company’s PAYGW or superannuation obligations remain unpaid and unreported three months after their due date. This is so even if a company enters into administration or liquidation before a notice of the penalty is served or within 21 days of that notice.

Where liability is for PAYGW amounts actually withheld, or a company underreports a superannuation guarantee charge statement, then the penalty is not remitted to the extent that the company has not notified the Commissioner of those amounts or has underreported before the due date. Where the liability is for an amount which is estimated under Div 268, then the penalty is not remitted to any extent (see 269-30 TAA 1953).

Changes to the time frames under which new directors must act to avoid personal liability for debts incurred by the company before they took office:

  • Penalties will not be remitted after time when a company enters administration or liquidation is three months from the date they became directors
  • New directors now have 30 days from becoming directors of a company before they can be issued with a director penalty. (Extension accounts for putting SGC affairs in order as well)*. 

* This applies to PAYGW non-compliance tax as well (below)

Expansion of defences under s 269-35 TAA 1953^:

  • A director is not liable if because of illness or some other good reason, it would have been unreasonable to expect them to take part, and they did not take part in the management of the company
  • No liability of a director took all reasonable steps to ensure payment of the obligations, or that he company entered into administration or liquidation, or otherwise where there were no reasonable steps that the director could have taken ensure those things happened

^ Defences are also applicable to PAYGW non-compliance tax (below).

Defences must be raised with the Commissioner within 60 days of receiving notice of a penalty.

PAYGW non-compliance tax

This will be levied on directors or their associates to the effect that the PAYGW credits are effectively withheld until the company complies with its PAYGW obligations. Credits will only be made available when a company subsequently pays the amounts withheld (s 18-165 TAA 1953). There is no incentive to delay paying the withheld amounts as interest payments on credits for later compliance are not payable (s 18-130 TAA 1953).

An associate may be liable to PAYGW non-compliance tax in two different circumstances:

  • Where they had actual knowledge of a company’s failure to pay, or were reckless as to that knowledge (based on their relationship with a director or the company), and they did not either take reasonable steps to influence the director to comply or otherwise reportthe non-compliance to the Commissioner or other responsible authorities
    • ‘Responsible authority’ includes Minister, the police, ASIC or the Building and Construction Industry Commissioner
    • Where that associate was an employee of the company, and the Commissioner is satisfied that they were treated more favourably than other employees of the company.

PAYGW non-compliance tax will not apply where a director is liable to pay a penalty under Div 269. The tax must only be imposed if Commissioner is satisfied that it is fair and reasonable to do so. This discretion allows the Commissioner to consider the circumstances of each case.

 The amendments contain a right of indemnity and contribution in respect of directors’ liability to PAYGW non-compliance tax, which recognises that directors must share responsibility for the company’s conduct, even if they receive different amounts of PAYGW credits due to differing salaries.

Recent measures put in place to combat non-compliance

In addition to the above amendments to the TAA, the ATO announced the formation of an inter-agency phoenix forum, whose members include ASIC, the ATO, the Department of Sustainability, Environment, Water, Population and Communities, Fair Work Building and Construction, and the Fair Work Ombudsman. The purpose of the forum is to:

  • Perform intelligence and strategic oversight advisory roles
  • Facilitate collaboration
  • Achieve cross-agency outcomes

In response to the uncertainty about the Commissioner’s ability to successfully rely on s 444-15 TAA 1953, the ATO has also released a new GST compliance program which focuses on:

  • Preventing and dealing with phoenix activities
  • Enforcing GST obligation that have been deliberately avoided

What is the impact on Building and Construction specifically?

The building and construction industry has been identified as an industry with significant compliance issues.

From 1 July 2012, under the Taxation Administration Amendment Regulation 2012 (No. 1) (Regulations), if an entity carrying on a business that is primarily in the building and construction industry and the entity has an Australian Business Number (ABN) (purchaser), the purchaser must report the details of the payment they make where a supplier supplies them with:

  • Building and construction services; or
  • A combination of both goods and building and construction services

A purchaser is ‘carrying on a business that is primarily in the building and construction industry’ only if:

  • In the current financial year, 50% of more of the purchaser’s business activity relates to building and construction services; or
  • In the current financial year, 50% or more of the purchaser’s business income is derived from providing building and construction services; or
  • In the financial year immediately preceding the current financial year, 50% or more of the purchaser’s business income was derived from providing building and construction services

‘Building and construction services’ includes a wide range of activities – refer to the list in the Regulations.

Payments do not need to be reported if:

  • They are to individuals and entities that are subject to the PAYGW rules
  • Where the supply of services is only incidental to the supply of goods
    • N.B. Whether or not a supply of services is incidental depends on the circumstances of each case
    • Where payments are for materials only
    • If the purchaser and supplier are part of the same consolidated group or MEC group
      • If payments are made outside the group, they must be reported
      • If they are made in a private or domestic capacity (as no income is derived from the building and construction services)

Payments should be reported at the correct time. Hence for the current financial year should not be reported unless they have been paid for, even if the purchaser accounts for expense on an accrual basis.

Other legislative changes

The Corporations Amendment (Phoenixing and Other Measures) Act 2012 (Phoenixing Act) came into effect on 1 July 2012 with the purpose of facilitating the payment of employee entitlements. The Act permits ASIC to order the winding up of a company where it has been ‘abandoned’ by its directors (s 489E Corporations Act). Before making an order, ASIC must publish its intention to do so, and it must not make an order if an application is before court for the winding up of the company.

Where an order is made, the usual requirements under the Corporations Act for passing company resolutions and meetings of creditors are taken to have been complied with. Hence, the obligations of a liquidator and other provisions in s 496 of the Corporations Act have effect as if a director’s declaration of solvency had been made under s 494.

The draft Corporations Amendment (Similar Names) Bill 2012 proposes to make a director of a debtor company liable to debts incurred by that company where they have previously been a director of a failed company that had the same or similar names. The purpose of this Bill is to deter the creation of an impression that a similarly named company is a continuation of a failed company (as per Explanatory Document, Similar Names Bill).

The proposed provisions would make that director liable individually and jointly together with the debtor company and anyone else liable under these amendments to the same debt. A director’s liability will be established if the criteria in the proposed s 596AJ are satisfied. The Bill would apply to any director who met the s 596AJ test without the need for any order by a court or tribunal. Directors may seek an exemption from liability from the court or liquidator only after it has been thrust on them under ss 596AK to 596AN.

What is the impact on directors?

Directors and officers are now at more risk of being held to account for any inadvertent oversights or failings regarding the tax obligations of their company

Directors must take steps to ensure that they are aware of the financial and tax payment position and compliance history of the companies they represent

In reducing the risk of non-compliance, it is imperative that directors ensure their companies have appropriate tax governance processes in place that quantify the amount, and remittance of the company’s income tax and withholding obligations, and that finance and tax teams have the appropriate expertise.
Criticisms of the current and proposed changes

The chief criticism from opposition and business groups are that the measures apply too broadly – rather than in the context of phoenix activity.

Other criticisms of the measures include:

  • That they would apply to directors of charitable and not-for profit organisations
  • Existing measures to combat phoenix activity were sufficient but not being used
  • Directors might be more focused on compliance with their obligations rather than on the performance of the company for the benefit of its shareholders

The Australian Institute of Company Directors in its submissions on the Similar Names Bill and the Phoenixing Act states that the laws effectively vest judicial power in liquidators or ASIC, respectively, and could give rise to a possible constitutional challenge in the future.

The Law Council of Australia criticised the Similar Names Bill for creating a ‘reversal of the presumption of innocence’. They argued that a director (subject to the other legislative criteria) who had not engaged in phoenix activity but had simply managed a company that had genuinely failed would have to make an application to the court or liquidator to extract themselves from an automatic liability should a similarly-named company they are a director of incur debts of its own. They also submitted that directors would be potentially be exposed to multiple claims from the debtor company’s creditors.

Peter Gell

Peter was admitted as a solicitor in 1981 and holds qualifications in law and a Masters degree in taxation conferred by the University of NSW. Peter practises in taxation advisory, estate planning and wills, probate and commercial law.