Director Penalty Notices Explained

Background

The Australian Tax Office (ATO) has implemented the Director Penalty Notice (DPN), a regulatory mechanism designed to enforce the tax compliance of company directors. This instrument plays a critical role in ensuring that directors are held accountable for the tax obligations of their companies, by allowing the ATO to recover certain company debts from its director(s) particularly in relation to:

Pay As You Go (PAYG) withholding;
Goods and Services Tax (GST); and
Superannuation Guarantee Charge (SGC) liabilities.

Receiving a DPN is a serious matter. Once the notice has been issued, you have a limited timeframe to respond and avoid personal liability. Given that company debts are often large in scale, personal liability for company debts can bankrupt directors.

The best way to avoid this outcome is to meet your obligations as a Director and stay abreast of the company’s financial situation and to seek advice from experienced professionals such as your accountant or solicitor and SV Partners as soon as possible.

In this article, we discuss DPNs and how you should respond if you receive a notice from the ATO.

Historical Context

The concept of DPNs was introduced as part of the Tax Laws Amendment (2012 Measures No. 2) Act 2012. This legislation was aimed at mitigating risks associated with phoenix activities, where companies are deliberately liquidated to avoid paying debts, and subsequently re-established under a new name (ATO – Phoenix operators).

Purpose and Objectives

The primary objective of DPNs is to ensure that company directors remain personally liable for their company’s unpaid tax debts. This measure is intended to promote responsible corporate governance and prevent the accumulation of tax debts that could negatively impact employees and the broader economy (ATO – The fight against tax crime).

Mechanism and Enforcement

Issuance of DPNs

A DPN can be issued when a company has failed to meet its PAYG withholding, GST or SGC obligations. The ATO can issue two types of DPNs. The way you respond to a DPN depends on whether you receive a Non-Lockdown DPN or a Lockdown DPN.

Essentially the ATO provides directors with 21 days from the date of the DPN to comply with the obligations set out within the DPN. Failure to comply within this period results in the automatic imposition of personal liability on the Director (ATO – DPNs issuance).

Two Types of DPNs

There are two main types of DPNs:

Non-lockdown DPNs: These are issued when the company has lodged its Business Activity Statements (BAS), Instalment Activity Statement (IAS) within 3 months of their due date but failed to remit the payments or SGC statements by their due date (or they will become lockdown DPNs).

If a Director receives a non-lockdown DPN, they can avoid personal liability by using the company to take one of the following actions within 21 days:

Paying the debt in full
Appointing a Voluntary Administrator
Appointing a Small Business Restructuring Practitioner
Appointing a Liquidator

Unfortunately, directors are unable to avoid personal liability by entering into a payment arrangement with the ATO once the DPN has been issued. If you do enter an ATO payment arrangement, you will still be personally liable for the debt at the end of the 21-day period (ATO – Types of DPNs).

Lockdown DPNs: These apply when the company has not lodged its BAS and IAS within 3 months of their due date or SGC statements by their due dates.

In such cases, directors become automatically liable for the company’s tax debts, and the ATO may pursue them for recovery irrespective of any subsequent actions taken by the company.

The only way to avoid personal liability is to immediately (within the 21-day period) repay the full amount of the debt.

If the company is unable to pay the debt, the Director immediately becomes personally liable (ATO – Types of DPNs).

Implications for Directors

The imposition of a DPN has significant implications for directors. It underscores the importance of timely and accurate tax reporting and remittance of same. Directors must be vigilant in their oversight of the company’s financial obligations to avoid personal liability.

Additionally, in cases where directors are unable to ensure compliance, they must consider proactive measures such as paying the debt amount in full, the appointment of an administrator, liquidator or small business restructuring practitioner to the company to mitigate their risk (ATO – Implications for directors).

How the ATO Recovers Director Penalties

Issuing a DPN is the first step when the ATO intends to recover unpaid company taxes from its directors. Once the DPN is issued, the ATO can recover the amount by:

Issuing a garnishee notice – A garnishee notice allows the ATO to collect the debt directly from a debtor of the director. This includes banks and financial institutions, your employer, or other people who owe you money.
Offsetting your tax credits against the Director penalties – Tax credits such as an income tax return can be applied directly to the Director penalty.
Initiating legal proceedings – The ATO can pursue the unpaid debt through the court. This may involve bankruptcy proceedings against the Director.

Defences and Relief

If you dispute the amount of the DPN, you may be able to seek relief of same. Directors may be able to avoid liability under certain circumstances where a Director has a genuine defence. You are not personally liable for the debt where:

You did not take part in managing the company during the relevant period. For example, if you were unwell and absent from the company during the period relating to the unpaid PAYG, GST or SGC or were appointed within the 30 days prior to the tax obligation becoming due.
You took all reasonable steps to ensure the company paid the outstanding amount, or that the company appointed an Administrator, Small Business Restructuring Practitioner or Liquidator.

These defences are only valid if they can be proven for the entire period during which you were responsible for managing the company.

Non-participation in the management of the company may still constitute a breach of your duties. While this defence can protect you against tax and superannuation debts, it may open you up to other personal liabilities (ATO – Defences and relief).

Conclusion

DPNs serve as a crucial enforcement tool for the ATO, aimed at fostering a culture of compliance and accountability among company directors. By understanding the implications and mechanisms of DPNs, directors can better navigate their responsibilities and safeguard their personal and professional interests.

Get Advice from SV Partners

Directors have a limited timeframe to respond to a DPN. If you fail to respond, you can be held personally liable for substantial company debts, which can impact your personal financial situation.

We recommend contacting SV Partners as soon as you receive a DPN.

SV Partners has a team of experienced Registered Liquidators and Registered Trustees. We deal in a broad range of corporate and personal insolvency matters, so we can help you reach the best resolution for your situation.

Article written by Andrew Allemand (Senior Manager) – Brisbane