The Australian Taxation Office (ATO) is often the last to get paid when a business doesn’t have enough money to cover everything. The ATO has a number of avenues available to recover debts from businesses as we discuss here. One of the ATO’s options is to issue a director penalty notice, which can have serious consequences for directors.
What is a director penalty notice?
A director penalty notice (DPN) is a notice the ATO can issue to directors of company to make them personally liable for two types of company tax debts, being:
- Pay-As-You-Go Withholding tax (PAYG)
- Superannuation Guarantee Charge (SGC)
There are two types of DPN:
- The first type of DPN gives directors 21 days to appoint a Liquidator or Administrator to their company to avoid personal liability.
- The second type, often referred to as a “lockdown DPN” makes the directors immediately liable for the company’s outstanding PAYG and/or SGC.
What types of debts will the ATO recover under a director penalty notice?
The ATO can issue a DPN to recover unpaid PAYG withheld from employee wages and reported monthly on Business Activity Statements (BAS) and Income Activity Statements (IAS).
A DPN can also be issued to recover unpaid superannuation, which becomes Superannuation Guarantee Charge (SGC) payable to the ATO if not paid each quarter.
When will the ATO issue a 21-day DPN or a lockdown DPN?
The ATO will issue a DPN when a company has an outstanding PAYG or SGC debt which is not subject to a payment arrangement and it is not complying with its obligations. It may be issued alongside a garnishee notice to a company’s bank or a statutory demand to commence winding up proceedings.
Which type of DPN the ATO issues depends on when a company has lodged its activity statements (BAS/IAS) and quarterly SGC statements, that have the outstanding debts. In particular:
- A 21-day DPN will be issued to directors of a company if the BAS, IAS or SGC returns have been lodged within three months of their due dates.
- A Lockdown DPN will be issued when outstanding debts relate to a BAS, IAS or SGC return which has not been lodged, or was lodged more than three months after its due date.
While BAS and IAS will be issued to your company, the quarterly SGC return is available on the ATO’s website.
What happens if I receive a director penalty notice?
If you receive a DPN you first need to determine which type it is, a 21-Day DPN or a Lockdown DPN, and the date it was issued. The notices can be confusing and the 21-day timeframe starts from the date of the letter, so it’s best to check with your solicitor or accountant immediately.
If you receive:
- A Lockdown DPN – you and any other directors are personally liable for the debt. If the company cannot pay the debt, the ATO may pursue the directors personally for payment which could lead to their bankruptcy. The directors can seek to enter to into
- A 21-day DPN – you need to:
- Consider whether the ATO may potentially issue another DPN for any other debts. For instance there may further amounts owing under unlodged BAS/IAS and SGC returns which the ATO has not yet calculated.
- Determine whether your company can and will pay the debt. If so, it should do so immediately.
- If your company cannot pay the debt, the options for the directors are:
- Become personally liable for the debt in anticipation that it will be paid from future trading profits. A payment arrangement should be entered into to properly manage the debt. Entering into a payment arrangement will not avoid the directors becoming personally liable for the debt after the expiry of 21 days.
- Appoint a Liquidator to close down the business, sell its assets, deal with creditors and investigate its affairs. The directors will avoid becoming personally liable for the debt if a Liquidator is appointed within 21 days of the DPN date.
- Appoint an Administrator to give the company breathing space to put a proposal to creditors to allow it to continue trading. The directors will avoid becoming personally liable for the debt if an Administrator is appointed within 21 days of the DPN date.
Sometimes the ATO may issue both types of DPN depending on when returns have been lodged. Each type of DPN will operate as above.
What can I do to avoid receiving a director penalty notice?
As well as encouraging business owners to pay their tax debts, the DPN regime is designed to get business owners to lodge their returns on time.
Many small businesses struggle to meet their ATO payments on their due dates, and in the past businesses just didn’t lodge returns so the ATO could not quantify the outstanding debt. This is no longer a realistic option.
If your company cannot pay its BAS, IAS or superannuation debts by their due dates, its best to lodge the returns anyway, or at least within three months. This way the directors will not become automatically liable for the company’s tax debts under a Lockdown DPN. The ATO will only be able to issue a 21-day DPN for outstanding debts, giving the directors options to avoid personal liability.
If the company doesn’t lodge its returns, how will the ATO the amount it is owed?
If you don’t lodge the company’s BAS, IAS or SGC returns within three months of their due dates, the ATO may make an assessment of the debt. This could be estimated based on past returns or alternatively they can conduct an audit to calculate the outstanding debt. Such assessments which generally be Lockdown DPN debts due to the expiry of three months prior to the assessments being raised.
Can I be personally liable for a company’s tax debts if I’m appointed after the debts are incurred?
Somewhat surprisingly, yes you can. New directors become personally liable for outstanding PAYG or SGC debts 30 days after their commencement as a director of a company. Accordingly, conducting due diligence into a company’s tax position is imperative.
If I resign as director can I still be liable for debts incurred by the company?
Yes. Anyone who was a director of a company when it incurred a PAYG/SGC debt may receive a DPN if that debt remains unpaid – even after they resign.
It is therefore essential that you ensure tax lodgements and payments are up to do if you intend to resign as a director. If you don’t not only could you be personally liable for the debt, but you will also have limited control over what can be done to avoid personal liability.
Are there any defences to a director penalty notice?
In most cases the answer is no. Often someone might not receive a director penalty notice or rely on their business partner or accountant to manage their tax lodgements, but these are not acceptable defences.
Severe illness, or evidence a director has taken all reasonable steps to cause a company to comply with its obligations are available, however the ATO interprets these very strictly.
Are there any other tips to dealing with director penalty notices?
Company directors should consider the following if they concerned that a DPN may be issued for their company’s debts:
- DPNs will always be sent to a director’s residential address, and often to the company. Directors should ensure their residential address and company’s registered office are updated with the Australian Securities and Investments Commission.
- Directors should ensure that a company’s employees and subcontractors are appropriately classified, such that required amounts of PAYG and superannuation are withheld or paid in respect of payments to relevant parties.
Given the serious effects that a director penalty notice can have on company directors’ personal financial positions, we recommend directors, their accountants or their advisers seek immediate advice to quickly determine how best to deal with it.
Why not pick up the phone and get in touch to have your questions answered in a no-cost confidential discussion.