Company Directors are legally responsible for ensuring that a company’s tax and superannuation obligations are reported and paid on time. Most of our readers would be aware of the director penalty regime, and how the ATO can utilise these legislative provisions to force the Director(s) of a company to personally pay outstanding:
- Pay As You Go Withholding (PAYGW)
- Goods and Services Tax (GST)
- Superannuation Guarantee Charge (SGC).
A Director becomes liable to a penalty at the end of the day on which the company is due to meet its obligation. At this time, the penalty is created automatically. The ATO does not need to issue any notices or take any action to create the penalty. However, the Commissioner of Taxation (or the appropriate Delegate of the Commissioner), must not commence proceedings to recover a director penalty until 21 days after a Director Penalty Notice (“DPN”) is issued to a Director. Even if you resign as a Director of the Company, you can be liable for director penalties for liabilities of the Company. Similarly, if you are appointed as a new company Director, you can become personally liable for any unpaid amounts.
There are two types of DPN’s: non-lockdown DPN and lockdown DPN.
Non-lockdown DPN
A non-lockdown DPN can be issued to a Director of a company that has lodged its business activity statements (BAS), instalment activity statements (IAS) and/or superannuation guarantee charge statements within three (3) months of the due date for lodgement, however the PAYG withholding, GST and/or SGC debts remain unpaid. The notice gives the Director 21 days to take one of the following actions:
- pay the debt in full; or
- appoint a Voluntary Administrator (VA) over the Company; or
- appoint a Small Business Restructuring (SBR) Practitioner over the Company; or
- appoint a Liquidator over the Company.
There is a misconception that Directors can avoid personal liability by entering into a payment plan with the ATO within 21 days, however this is not correct. The payment plan simply allows the Director to repay the liability by way of instalments, however the Director becomes personally liable for the whole debt after the end of the 21-day period. In the event the Company (or the Director) defaults on the payment plan, the ATO can commence proceedings against the Director personally, seeking recovery of the relevant tax debt(s).
Lockdown DPN
A lockdown DPN can be issued to a Director of a company where the Company has failed to lodge its BAS, IAS and/or SGC statements within three (3) months of their due date for lodgement. In this case, the penalty permanently locks down on the Director and there is no ability to remit the penalty (i.e. avoid personal liability), except by paying the debt in full.
Please refer to prior SV Partners’ newsletter articles (Director Penalty Notices (DPNs)… How Does This Personally Impact Your Clients and What You Need to Know About the ATO Tax Debt and the Consequences of Failure to Pay) where the DPN regime is explained in more detail.
It has been reported that the ATO intends to utilise the DPN regime more often in 2024 as the ATO ramps up its actions to recover $30 billion in overdue small business tax.
We have recently become aware that the ATO can (and will) issue lockdown DPN’s on company Directors even after the Director has:
- placed the Company into Liquidation; or
- appointed a Voluntary Administrator over the Company; or
- appointed a Small Business Restructuring Practitioner over the Company.
We have seen instances where the ATO has issued lockdown DPN’s on company Directors where the Directors have placed the Company in Voluntary Administration and Creditors (particularly where the ATO was the only major creditor) have subsequently resolved to accept the Directors’ proposal for a Deed of Company Arrangement (DOCA).
Many company Directors and professional advisors are not aware of the difference between a standard DPN (i.e. non-lockdown DPN) and a lockdown DPN. It is important to understand your obligations as a company Director and, in particular, how you may not be able to avoid personal liability of certain company debts, including tax debts, even if you appoint an insolvency practitioner over the Company.
The moral of the story is to have your lodgements up to date and seek specialist insolvency advice sooner than later! Your local SV Partners’ team is always available to assist you and your clients with any DPN or other insolvency related queries.
Article written by Shaun Fernando (Associate Director) – Melbourne