Directors are responsible for ensuring that their company is meeting its tax and superannuation obligations. Where a company has certain types of unpaid liabilities, the Australian Tax Office (ATO) can issue a Director Penalty Notice.
Receiving a DPN is a serious matter. Once the notice issues, 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.
In this article, we discuss Director Penalty Notices and how you should respond if you receive a notice from the ATO.
What is a Director Penalty Notice?
A Director Penalty Notice (DPN) is a notice issued by the ATO. It allows the ATO to recover certain company debts from its director(s). The ATO can use a DPN to recover unpaid amounts of:
- Pay As You Go Withholding (PAYGW)
- Goods and Services Tax (GST)
- Super Guarantee Charge (SGC)
Company directors are personally liable for these debts if they are not paid by the due date. In effect, a DPN is an official notice that the ATO is taking steps to recover these debts from the director(s).
Non-Lockdown and Lockdown DPNs
The ATO can issue two types of DPN. The way you respond to a DPN depends on whether you receive a Non-Lockdown DPN or a Lockdown DPN:
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Non-Lockdown DPN
A non-lockdown DPN can be issued where a company has lodged its Business Activity Statements (BAS), Instalment Activity Statements (IAS), and/or SGC statements within 3 months of their due date.
If a director receives a non-lockdown DPN, you 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
Directors are unable to avoid personal liability by entering into a payment arrangement with the ATO once the DPN issues. 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.
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Lockdown DPN
A lockdown DPN can be issued where a company has not lodged its Business Activity Statements (BAS), Instalment Activity Statements (IAS), and/or SGC statements within 3 months of their due date.
If a director received a lockdown DPN, the only way to avoid personal liability is to immediately use the company to repay the full amount of the debt. If the company is unable to pay the debt, the director immediately becomes personally liable, and may need to declare bankruptcy to repay the amount.
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 bankrupting the director.
Defences to a Director Penalty Notice
There are several circumstances where a director has a genuine defence to a Director Penalty Notice. 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 PAYGW, GST or SGC.
- 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.
Get Advice From SV Partners if You Receive a Director Penalty Notice
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 is a team of experienced Registered Liquidators. We deal in a broad range of corporate and personal insolvency matters, so we can help you reach the best resolution for your situation.
Contact us if you are concerned about your company’s position, or call us immediately if you receive a DPN from the Australian Tax Office.
