A proprietary limited company is a common structure for most people to use when they are running a business. One of the main benefits in having a business structure which uses a proprietary limited company as the trading entity is that it provides that person with a degree of protection personally – it will be the company which is responsible for any liabilities and the like, not the individual or individuals behind the company.
It is fairly common for a person to agree to be a director of these companies without much thought on the assumption there is little risk in being the director. This is increasingly not the case though. Aside from the general requirements for directors to diligently discharge their duties (such as running the company properly), there is now a significant personal risk for directors where certain obligations have not been met.
Directors are personally liable for any pay-as-you-go withholding tax, goods and services tax and superannuation guarantee charges which have not been paid for by the company, save for very limited circumstances (such as where they were not actively involved in the management of the business due to health reasons).
What may be surprising to some people is that this liability will arise whether the director is actively involved in the business or not (nothing that is no excuse to be unaware of the situation), and each director will be personally liable for the whole amount (so if one director is unable to pay any outstanding liability it will fall to the other director/s).
In addition, if someone joins a company as a director and that company has pre-existing unpaid liabilities for pay-as-you-go withholding tax and superannuation guarantee charges, then that director will become personally liable for those outstanding taxes and charges, other than in very limited circumstances and notwithstanding that he or she was not a director at the time the liabilities were first incurred.
In the event there are unpaid liabilities for pay-as-you-go withholding tax, goods and services tax and superannuation guarantee charges, the ATO is able to issue what is called a Director Penalty Notice. If a DPN is issued, a director will have to address the issues raised, failing which the ATO can take further steps to recover the debt.
The pathway from this is that a person needs to be very careful when becoming a director of a company – it is not a matter of simply ‘signing on the dotted line’. For existing companies, it is important that you know the financial position of the company before agreeing to be a director, whilst for new and existing companies it is important you implement appropriate measures to ensure you can be satisfied that the pay-as-you-go withholding tax, goods and services tax and superannuation guarantee charges are being paid.
A failure to do so may result in a significant and unavoidable personal liability for you.
This article was published in the Stock Journal in July, 2023.