The New Directors Penalty Regime

The new Director Penalty Regime, introduced in June 2012, ends all doubt about whether a director can have a passive involvement in a company. It is a warning to company directors that being a director is serious business and that unless they monitor their company’s activity, they are risking their house.

As the preferred vehicle for new business ventures, companies are a key factor in protecting the entrepreneur’s personal assets. Being a separate legal entity, if things go bad in the business, it is the company that holds the bag, not the directors personally. Obviously, there are exclusions to this general proposition. When a director seriously breaches their legal duties as a director or allows the company to trade insolvent i.e. incurring debt when the company can’t afford to pay it, they may be personally attacked.

Too add to this, as though there isn’t enough to worry about, 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. In some SMEs, this personal liability can be in excess of tens of thousands of dollars per month. This liability remains notwithstanding that the company may later be put into administration or liquidation

Company directors must be aware of the financial position of their company. They must take all reasonable steps to ensure that the company is not incurring financial commitments that the company cannot afford. That means more than just taking the manager’s word for it!

And now, company directors must make sure, in particular, that PAYG withholding tax and employees superannuation are paid when due or alternatively, are adequately reported to the ATO through lodging BAS the Superannuation Guarantee Charge Statement on time.

The new Director Penalty Regime emphasis the serious obligation and risk in being a company director. This is especially the case when you are a director of someone else’s company. If in doubt about your obligations or the financial standing of a company, you have the option of getting legal and financial advice. If you’re already a director and have serious concerns about the financial health or conduct of a company, resigning as a director must be considered.

What to do next: If you would like more information on the new director penalty regime or directors duties generally, call Joe Kafrouni or Rob Montes on (07) 3354 8888 or email joe@klaw.com.au or rob@klaw.com.au.

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