As a company director in Australia, it’s imperative to understand and fulfil your key duties to ensure the smooth operation and legal compliance of your company. Failure to do so can result in severe consequences – financially and legally – for both the company and you personally.
We have outlined some of the core responsibilities, as well as important considerations, to be aware of before, and during, your period as a company director.
Considerations when Accepting the Role of Company Director
As a company director, you are entrusted with guiding and overseeing the management of your company. In many cases, directors of small proprietary companies are actively involved in day-to-day operations.
Before agreeing to become a company director or secretary, it’s crucial to assess your willingness, capability, and dedication to fulfilling these vital roles. You should not agree to be appointed as a director or secretary based on promises that suggest minimal involvement, such as being told “you won’t have to do anything” and “just sign here”. Agreeing to such requests without a comprehensive understanding of what is involved, could expose you to substantial liabilities.
Key Duties of Company Directors in Australia
Accepting a position as a company director involves taking on a number of critical responsibilities. Some of the key duties that are expected to be fulfilled are outlined below. It is important to note that these are not the only responsibilities that may be required, rather the minimum that is expected.
Directors who fail to comply with their obligations can face serious penalties and consequences – civil penalties, compensation proceedings and criminal charges.
Company Directors are responsible for:
- Honesty and Care: Directors must conduct all dealings with honesty and care, prioritising the best interests of the company above personal gain.
- Understanding Company Operations: It’s crucial for directors to have a comprehensive understanding of their company’s activities in order to make informed decisions. This should include regularly speaking with management and staff to stay up-to-date with what is happening, as well as actively participating in directors’ meetings.
- Debt Management & Solvency: Directors are responsible for staying informed regarding the business’ financial position and ensuring that the company can pay its debts on time. The responsibility also extends to avoiding incurring debts when the company is insolvent.
- Financial Records: Maintaining proper financial records is a fundamental duty of directors to ensure transparency and accountability in the company’s financial affairs.
- Acting in the Company’s Best Interests: Directors must always act in the best interests of the company, even if it conflicts with their personal interests.
- Confidentiality: Directors must use any information they obtain in the course of carrying out their role solely for the benefit of the company.
- Seek professional advice: It is crucial that company directors are proactive in seeking trusted, professional advice when they need assistance to make an informed decision.
Directors Duty to Prevent Insolvency
Directors’ responsibilities are based on the Corporations Act 2001 (the “Corporations Act”) as well as Common Law.
Under Section 588G of the Corporations Act, directors have a duty to prevent a company from incurring debts if there are reasonable grounds to suspect insolvency. Breaching this duty can result in severe penalties, including fines, criminal charges and disqualification from managing a corporation.
For this reason, it is essential for directors to exercise due care and caution in managing company affairs, especially when the company is facing financial difficulties.
What is a Director Identification Number (Director ID)?
The Australian Taxation Office (ATO) has introduced the use of Director Identification Numbers, “Director IDs”.
All directors are required by law to verify their identity with the ATO before receiving a Director ID. This is important because it will help to:
- prevent the use of false or fraudulent director identities
- make it easier for external administrators and regulators to trace directors’ relationships with companies over time
- identify and eliminate director involvement in unlawful activity, such as illegal phoenix activity.
** Illegal phoenix activity is when a company is liquidated, wound up or abandoned to avoid paying its debts. A new company is then started to continue the same business activities without the debt.
With this increased visibility, those acting unlawfully are now more likely to be identified, and held accountable, for their actions.
Director Penalty Notices: Personal Liability for Company Debts
Ensuring that the business is in a good financial position – by adhering to its payment obligations and monitoring its liabilities – is not just a moral obligation. As a company director, it is imperative to be acutely aware of your company taxation obligations and liabilities, as certain unpaid company tax debts can become your personal liability.
Many company directors are unaware of the fact that if a company that is under their directorship does not pay certain liabilities by the due date, the ATO can seek to recover these amounts from them personally, as a current or former company director.
As a company director, you become personally liable for your company’s unpaid amounts of:
- pay as you go withholding (PAYGW)
- superannuation guarantee charge (SGC)
- net goods and services tax (GST) – including wine equalisation tax (WET) and luxury car tax (LCT)
The ATO uses Director Penalty Notices (DPNs) to formally notify a director that a time limit has been placed on their obligations to promptly comply with any lodgement and payment obligations.
In their efforts to recover the billions of dollars worth of outstanding small business tax debts, the ATO are increasingly utilising sophisticated data-matching tools to identify and target directors who are likely able to meet the DPN demand. Indicatively, 30,000 DPNs have already been issued in 2024.So if your business has outstanding tax debts, it is only a matter of time before the ATO cacthes up with you.
Read Director Penalty Notices: Personal Liability for Company Debts to learn more about DPNs and what to do if you receive one.
Lessons Learned from Real-Life Cases
Real-life examples illustrate the severe consequences of director negligence and highlight the risks associated with the role.
In one circumstance, a highly respected and well-standing accountant became a company director, only to then have the company fold into liquidation and eventually owe millions to creditors, including the ATO for unpaid PAYG and Superannuation. The company had two other directors: both of whom were non-resident to Australia. When the business took a turn for the worst, these directors retreated to their home countries, leaving the accountant director to act solely here in Australia.
The takeaway here is that, regardless of the details of the individual situation, we cannot stress enough the importance of truly understanding, and diligently executing, your responsibilities as a company director. Essentially, a person should not become a director unless they fully comprehend and accept the risks associated with the role.
If it eventuates that the business is in trouble, or some less-than-desirable decisions are made, there is little protection from some very serious consequences.
Seek Professional Advice for Director Duties
No doubt, directors play a pivotal role in ensuring the integrity and success of their companies. By understanding and fulfilling their duties, directors can safeguard their companies’ interests and avoid potential legal consequences and penalties. Compliance with regulatory measures such as obtaining a Director ID, and a duty to prevent trading while insolvent, (among many other things!) is crucial.
The team of tax accountants and lawyers at The Quinn Group have considerable experience when it comes to understanding, and advising on, company director responsibilities.
If you are a company director and would like expert advice on your specific situation, or perhaps you are considering accepting a director role and would like to better understand what exactly is involved, contact us by completing an online enquiry form, call 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange a meeting or teleconference.
