UNDERSTANDING DIRECTORS PENALTY NOTICES AND EIGHT (8) STEPS TO AVOID THEM

Directors Penalty Notices (DPNs) issued by the Australian Taxation Office (ATO) are serious matters that can have significant implications for company directors in Australia. These notices are used by the ATO to recover unpaid Pay As You Go (PAYG) withholding, GST and Superannuation Guarantee Charge (SGC) liabilities from directors personally.

Company directors are responsible to ensure that company’s taxes and Super are reported and paid on time. Understanding the implications and obligations associated with DPNs is crucial for directors to navigate potential financial and legal ramifications effectively.

What is a Directors Penalty Notice (DPN)?

A DPN is a formal notice issued by the ATO to a company director when their company has failed to meet its PAYG withholding, GST and/or SGC obligations. Under the Australian law, directors have a legal responsibility to ensure that their company meets its tax obligations.

When a company fails to meet its taxation obligations, the ATO may issue a DPN to the company directors personally. The notice informs the directors that they are personally liable for the unpaid amounts owed by the company.

Types of DPNs

There are two types of DPNs:

1. Non-Lockdown DPN: This type of DPN allows directors to avoid personal liability by taking one of the following actions within 21 days of the notice being issued:
2. Paying the outstanding amounts owed by the company;
3. Appointing an administrator if the company is insolvent and entering into a payment arrangement with the ATO;
4. Appointing a liquidator to wind up the company.; or
5. Appointing a small business restructuring practitioner.

If the directors fail to take any action within the specified timeframe, they become personally liable for any unpaid amounts.

2. Lockdown DPN: This debt occurs when the relevant tax returns are not lodged within the following time frames:
3. The due date for lodgement of SGC statements; or
4. Three months of the due date for lodgement of BAS and IAS.

Once a Lockdown DPN is issued, directors are unable to avoid personal liability by placing the company into administration or liquidation. Directors can only avoid personal liability by paying the outstanding amounts owed by the company within the specified timeframe.

Implications of a DPN

Receiving a DPN can have serious consequences for directors, including:

1. Personal Liability: Directors become personally liable for the unpaid PAYG withholding, GST and/or SGC amounts owed by the company. This means that the ATO can pursue directors personally to recover the outstanding amounts.
2. Legal Action: If directors fail to comply with the requirements of a DPN, the ATO may initiate legal action against them to recover the outstanding amounts. This can result in court proceedings, garnishee orders, or other enforcement actions.
3. Impact on Credit Rating: Failure to address a Directors Penalty Notice can negatively impact a director’s credit rating and financial standing.
4. Disqualification: Directors who fail to comply with the obligations imposed by a DPN may face disqualification from managing companies in the future.

Responding to a DPN

Directors who receive a DPN should take immediate action to address the situation. This may involve:

1. Seeking professional advice from a solicitor, qualified accountant or tax advisor.
2. Assessing the company’s financial position and exploring options for addressing the outstanding liabilities.
3. Communicating with the ATO to negotiate payment arrangements or seek alternative solutions.
4. Considering the implications of personal liability (i.e. personal assets).

Defences to DPN

Defences available to a director against a DPN are somewhat limited. The director may avoid a personal liability, in addition to the abovementioned steps, if he or she:

1. did not take a part in the management of the company during the relevant period either due to illness or another acceptable reason; or
2. the director took all reasonable steps to ensure that one of the following happened:
3.  the debt is paid;
4. the administrator was appointed to the company;
5. the director commenced winding up of the company; or
6. a small business restructuring practitioner was appointed.

The onus is on the director to provide evidence in support of his or her defence. 

Directors need to be aware that if they fail to participate in the management of the company this may result in them breaching their duties.

A new company director

A new director can avoid liability for director penalties that were due before the director’s appointment if within 30 days the company does one of the following:

1. Pay the company’s debts in full;
2. Appoints an administrator under sections 436A, 436B or 436C of the Corporations Act;
3. Starts the process of winding up the company; or
4. Appoints a small business restructuring practitioner under s453B of the Act.

The new director cannot avoid personal liability even if he or she resigns within the 30 day period.

Former directors’ liabilities

Former directors may be liable for company’s tax liabilities that were due:

•  before their resignations; and/or
• after their resignation if for PAYGW and net GST the first withholding event in the reporting period occurred before their resignation and for SGC if they were directors during the period the debt was accrued.

Steps to take to avoid a DPN

Directors can take several proactive steps to avoid receiving a DPN from the ATO and mitigate the risk of personal liability for unpaid tax obligations. Here are some key steps directors can take:

1. Ensure Timely Lodgement and Payment: Directors should ensure that their company lodges all required tax returns and activity statements on time and pays all tax liabilities by the due dates. Keeping accurate and up-to-date financial records can help in meeting these obligations promptly.
2. Monitor Tax Compliance: Directors should regularly monitor the company’s tax compliance status to identify any potential issues or outstanding obligations. This includes staying informed about changes in tax laws and regulations that may impact the company’s tax obligations.
3. Seek Professional Advice: Directors should seek advice from legal experts, qualified accountants or tax advisors, to ensure compliance with tax laws and regulations. Professional advisors can provide guidance on tax planning strategies, compliance requirements, and risk management techniques tailored to the company’s specific circumstances.
4. Implement Internal Controls: Directors should implement robust internal controls and procedures to ensure accurate reporting and compliance with tax obligations. This may include segregation of duties, regular reconciliations, and periodic reviews of financial records to identify errors or discrepancies.
5. Address Financial Difficulties Promptly: If the company experiences financial difficulties, directors should take proactive steps to address the situation promptly. This may involve seeking financial advice, restructuring debt, negotiating payment arrangements with creditors, or considering voluntary administration or liquidation if necessary.
6. Stay Informed About Director Responsibilities: Directors should stay informed about their legal responsibilities and obligations under the Corporations Act and taxation laws. This includes understanding the potential consequences of non-compliance, such as personal liability for unpaid tax debts.
7. Maintain Effective Communication with the ATO: Directors should maintain open and transparent communication with the ATO regarding the company’s tax affairs. This may involve responding promptly to ATO correspondence, providing requested information or documentation, and notifying the ATO of any changes in the company’s circumstances that may affect its tax obligations.
8. Document Decision-Making Processes: Directors should document their decision-making processes and actions taken to ensure compliance with tax laws and regulations. This can help demonstrate due diligence and good corporate governance practices in the event of an ATO audit or investigation.

By taking these proactive steps, directors can minimize the risk of receiving a DPN from the ATO and protect themselves from personal liability for unpaid tax debts. However, it’s essential to seek professional advice and guidance to ensure compliance with relevant laws and regulations and mitigate potential risks effectively.

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Conclusion

DPNs issued by the ATO are a serious matter that requires prompt attention and careful consideration. Company directors have a legal responsibility to ensure that their company meets its tax obligations, and failure to do so can result in significant personal and financial consequences. By understanding the implications and obligations associated with DPNs, directors can take proactive steps to address outstanding liabilities and mitigate potential risks effectively.

If you are a director and have received a DPN or you are expecting to receive one, you should reach out to our firm for assistance on 07 3370 5100

Drazen Kozaric