When does the company's tax debt become yours?

The corporate veil: real, but not tax-proof

A company is a separate legal person. It contracts in its own name, owes its own debts, and when it fails, its creditors — including the ATO — are generally left to prove in the liquidation, not to chase the directors. Running up a company tax debt is not, by itself, something you're personally liable for. Directors sometimes assume the worst here; the starting position genuinely favours you.

But Parliament has spent forty years drilling holes in that veil precisely where tax debt is concerned, because the three debts that dominate small-company arrears — PAYG withholding, GST and super — are money the law treats as held for employees and the government, not working capital. Here are the four exceptions that matter, in order of how often they bite.

Exception 1: director penalties — PAYGW, GST and SGC

The director penalty regime makes each director automatically liable for a penalty equal to the company's unpaid PAYG withholding, net GST and superannuation guarantee charge. The ATO activates recovery by issuing a director penalty notice — 84,529 of them in a single recent year — and from the notice date you have 21 days in which certain actions can still remit the penalty.

The critical split is lockdown vs non-lockdown: if the company lodged its BAS within 3 months of the due date (and SGC statements by their due date), the penalty can be wiped by payment, administration, SBR or liquidation within the 21 days. If lodgments were late, only payment clears it — no insolvency appointment helps. Which is why the single cheapest protective habit a director has is lodging on time even when the company can't pay.

Income tax debt, by contrast, is not covered by the regime — a company's unpaid income tax stays with the company unless some other exception applies.

Exception 2: personal guarantees — but not to the ATO

A common 2am fear, worth killing cleanly: the ATO does not take personal guarantees for company tax debt. There's no form you signed that secretly guarantees the BAS. The ATO's route to you is the DPN regime, full stop.

Other creditors are a different story. Landlords, trade suppliers, equipment financiers and banks routinely require directors' guarantees — often buried in credit applications signed years ago. When a company fails, these surface fast. They're contract debts: they survive the company's liquidation, they survive an SBR compromising the company's debt (the plan binds the company's creditors against the company, not against you as guarantor), and they're enforceable through ordinary court proceedings against you. An early audit of what you've actually signed is one of the most useful hours you can spend.

Exception 3: money that came out — unreasonable director-related transactions

If the company ends up in liquidation, the liquidator looks backwards. Payments and transfers from the company to directors and their close associates — above-market salaries in the death spiral, forgiving your loan account, the ute transferred to your spouse for $1 — can be unwound as unreasonable director-related transactions (up to 4 years back) or as uncommercial or creditor-defeating transactions. The money comes back from you personally. Anything that looks like moving value out of a sinking company to keep it from creditors is exactly what liquidators are paid to find; if a pre-insolvency adviser suggests it, that's a red flag, not a strategy. Watch your director loan account too: if the company's books show you owe it money (common where drawings weren't processed as wages), the liquidator will simply demand repayment.

Exception 4: insolvent trading

Directors have a duty to prevent the company incurring new debts once it's insolvent — unable to pay its debts as they fall due. Breach it and a liquidator can sue you personally for the new debts incurred. In practice, insolvent trading claims against small-company directors are less common than DPNs — they're expensive to run and directors often have little to recover — and safe harbour protects directors who, on spotting trouble, get advice and pursue a course of action reasonably likely to lead to a better outcome, such as a restructure. The message isn't "never trade through difficulty"; it's "the protection belongs to directors who act, not to those who drift".

If the company is liquidated: what stays, what follows

Note the asymmetry: liquidation within a DPN's 21 days remits non-lockdown penalties; liquidation after the window doesn't. And the ATO can still issue DPNs — particularly lockdown and SGC ones — after a company is already in liquidation. Timing is the whole game. For the choose-your-exit comparison, see SBR vs liquidation.

New directors, resigned directors

• Joining a board? You become liable for the company's existing unpaid PAYGW, GST and SGC 30 days after appointment, unless by then the debt is paid or the company is in administration, SBR or liquidation. Resigning within the 30 days doesn't save you. Never accept a directorship — including "just on paper" for a family business — without seeing the tax accounts first.
• Resigning? It stops new exposure but erases nothing: you remain liable for penalties relating to debts from your time, and can even be caught by some liabilities falling due after you leave if the underlying events pre-date it. Resignation also does nothing for guarantees you've signed. "Straw director" swaps — putting a relative in before the collapse — protect no one and attract regulator attention.