Some time ago, Joan and Jack had set up an asset protection strategy. By conventional standards, their strategy was foolproof. They were married. Jack was a builder and carried on business using a company. He was the sole director and shareholder. Jack's business was described as a boutique residential builder. The company had 15 employees. Joan was a designer employed with a large national construction company.
Knowing how volatile the construction industry can be, all their assets were in Joan's name: the family home, the 2 cars, and the boat. Everything seemed to be tucked away nicely. Jack could carry on business, sign personal guarantees, and provide indemnities without having to worry about exposing the family assets (which, of course, is not entirely true).
Like many companies in the construction industry, Jack's company suffered a few setbacks due to the pandemic. However, it seemed to recover well and even began to grow. Jack employed another 6 tradesmen. With a view to increasing the design side of the business, Joan resigned from her position and joined Jack's company as a director.
However, Joan immediately became aware that there were some scary tax skeletons in the closet. The company had not met all its lodgement and payment obligations for PAYG, GST and superannuation.
Perhaps this is how the company survived the pandemic? As you can imagine, this led to some interesting conversations at home.
After the initial shock wore off, Joan wasn't too worried. After all, it was the company's problem. Nevertheless, Joan still thought she should get some advice. As it was a tax issue, Joan sought the advice of her bookkeeper, who knew a little (but not much) about Director Penalty Notices (DPN).
Joan was advised that newly appointed directors have 30 days to establish whether any existing tax liabilities are outstanding. If there are outstanding tax liabilities, a new director can resign their directorship within that 30-day period and avoid personal liability.
Joan resigned as a director just before the 30-day deadline. She had a great sense of relief in mistakenly believing that she had dodged a bullet.
Unfortunately, Joan was mistaken. Here are a few points about DPNs to explain why:
Resigning as a director does not deal with a DPN.
Anyone who was a director at the time the debt was incurred can be held personally liable.
Newly appointed directors have only 30 days to establish whether any existing ATO liabilities are outstanding. If there are overdue liabilities, the new director must either:
Be satisfied that the company can pay the debt.
Appoint a liquidator, administrator or an SBRP.
If any of the above do not occur, the new director will be subject to a DPN for any tax debts accrued prior to their date of appointment.
To reiterate, new directors will be responsible for tax liabilities that arose before their appointment.
The DPN Joan eventually received was for over $500,000. This was a little bit more than half the value of the family home. Joan and Jack could not refinance.
They were forced to sell. Being a director for less than 1 month cost Joan the family home.
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