A Director Penalty Notice (DPN) can be issued by the ATO against company directors in order to recover unpaid debts. Company directors can be held personally liable for the outstanding tax liabilities of a business so it’s crucial to have a good understanding of your rights and obligations under this area of law.
If you’ve received a Director Penalty Notice, there are things you should know about your obligations and options. You must act quickly in response to receiving a DPN, and if you have any doubts, always seek legal advice immediately.
What is a Director Penalty Notice?
If a company fails to meet its Pay As You Go (PAYG) withholding and Superannuation Guarantee (SGC) obligations, the Australian Taxation Office (ATO) can recover the amounts owed from the company director personally under the Taxation Administration Act 1953 (Cth).
A DPN is the notice sent from the ATO directly to the company director and there are two types – the traditional DPN and the Lockdown DPN:
This type of DPN gives a company director 21 days to take action in order to avoid personal liability for the amount of tax owed by the company. It’s important for directors to be aware that the 21 day period begins at the date that the notice is sent, not the date it is received by the director.
Upon receiving a Director Penalty Notice, the director has the option to:
- Lead the company to repay the debt owed;
- Put the company into Liquidation or Voluntary Administration;
- Create a payment arrangement with the ATO
If a director receives a DPN, it is imperative that they act quickly. If the sum owed to the ATO remains unpaid after the specified period, the ATO will commence proceedings to recover that money from the director personally. The ATO has a range of ways that they may pursue the director including issuing a Garnishee Notice against the personal bank accounts of the company director. The ATO will pursue the director until they have reached bankruptcy.
If you receive a DPN and you find yourself unsure of what to do, seek legal advice immediately.
This means a director is automatically personally liable for the tax if company’s tax returns are not lodged on time, and as a result there is no chance to avoid liability once the DPN is served.
A lockdown notice will be sent when a director has failed to lodge business activity statements or instalment activity statements within three months of the lodgement due date.
The DPN regime basically enables the ATO to hold company directors personally liable for the company’s unpaid tax liabilities under the PAYG withholding system and the superannuation guarantee charge (SGC) provisions.
Who will be sent a Director Penalty Notice?
A DPN will be sent to all company directors, including associates, if they were involved at the time the company failed to pay the tax debts. Under s995-1 of the Income Tax Assessment Act, an ‘associate’ includes those related by blood or law.
The confusion arises when a director is new. A DPN will not apply to new directors straight away. If you become a director after the due date of the DPN, but remain a director for a period of 30 days afterwards, you will also become liable. This period of time aims to allow the new director the time to assess whether there is a backlog of PAYG and SGC and either act on it, or resign.
Former directors can also be liable for the unpaid tax if they were due up to the date the director resigned from the company.
How do I avoid personal liability?
The Director Penalty Notice laws were created with the aim of changing the behaviour of company directors – encouraging them to prioritise the payment of tax debts. Therefore, the easiest way to avoid liability for company tax debts is to ensure your company’s tax returns are up to date and lodged on time. It’s crucial you stay up to date with the company’s financial position by monitoring quarterly and monthly BAS Returns. You should also ensure the ATO has your current address on record. If the ATO sends a DPN to an incorrect address you have provided, you will not be able to avoid liability, despite not being aware of the notice.
Possible defences for Director Penalty Notices
There are a few accepted statutory defences to Director Penalty Notices, in which case a director will not be held liable for director penalties:
If the director had an illness, or some other good reason, that prevented them for participating in the management of the company, this may be a defence to a DPN.
2. Reasonable steps
If it can be shown that the director took all reasonable steps to ensure the company was compliant with tax obligations, then they will not be liable for the DPN.
3. No part
If it can be proven that you were not actually involved in the management of the company, then a defence can be made out. However, this defence is difficult to establish as the wording of the law requires a ‘good reason’ for a director to not be involved in the management of the company. This usually arises in situations where your spouse owns a company and you are helping out by acting as a director.
4. Attempted payment
Where a company director tried, but failed, to get the company to pay its tax obligations due to a dispute with other directors who caused the payment not to be made, the director may be able to create a defence if they are able to prove reasonable steps were taken to ensure the payment. In situations where one director did pay the DPN, under s269-45 of the Taxation Administration Act 1953, there is a right of indemnity available for that director and any other director who was equally liable.
5. No receipt
It is unlikely you’ll be able to claim a defence based on not receiving the DPN. There have been court cases where the ATO has provided evidence that it had sent the DPN to the correct address.
In regards to SGC, there is an additional defence available. If it can be shown that the company took reasonable care to pay the superannuation liability, but it was not paid for some good reason, the Superannuation Guarantee (Administration) Act 1992 provides for a 60 day period to raise a defence.
How will safe harbour impact Director Penalty Notices?
In late 2017, safe harbour provisions were introduced into Australian law. The reforms have removed the personal liability of company directors for company debt incurred during periods of insolvency, with the aim of helping businesses recover from financial distress. If a director can show that they were in the process of taking steps to turn the business around, and the plan was reasonably likely to be successful in turning the business around, the director will not be held liable for debts incurred during periods of insolvency.
Safe harbours will have a positive impact in regards to DPNs, by allowing opportunities for successful turnarounds and the avoidance of personal exposure. If a director did not meet the company’s tax obligations during a period of insolvency, then they may be protected from personal liability for that debt if the above can be established. However, note that safe harbour will not apply where there has been reckless or intentional disregard of tax law.