Back in November 2023, I wrote an article about the Australian Taxation Office ("ÄTO") outstanding lodgement amnesty program finishing up in December 2023. Since then, the ATO has returned to normal pre COVID collection procedures.
In seeking to encourage compliance, the ATO has also issued large numbers of Director Penalty Notices ("DPNs"), which is a notice issued to a director of a company in respect of unpaid tax liabilities of a company, including superannuation, PAYG and GST.
DPNs fall into two categories.
In circumstances where a company 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 lodgment, but the PAYG withholding, GST and/or SGC debts remain unpaid, the DPN gives the director 21 days to take one of the following actions:
- pay the debt in full
- appoint an administrator
- appoint a small business restructuring practitioner, or
- appoint a liquidator.
This is often referred to as a Non-Lockdown DPN.
In circumstances where a company has failed to lodge its BAS, IAS and/or SGC statements within 3 months of their due date for lodgment, there is no ability to avoid personal liability other than by paying the debt in full.
This type of DPN is often referred to as a Lockdown DPN.
At Cathro & Partners, we have seen a significant increase in corporate insolvencies over the last 12 months. We are now starting to see an increased in the number of individuals declaring bankruptcy or seeking to enter personal insolvency agreements ("PIA") because of personal liabilities stemming from corporate debts that have personal guarantees attached, and liabilities for expired or Lockdown DPN's, caused by directors failing to comply with their on-time lodgement obligations for Company PAYG, superannuation and/or GST.
Unknown Lockdown DPN exposure
A recent example was where our firm was engaged by a corporate client to undertake a safe harbour process. To be eligible to undertake the safe harbour process there is an eligibility stage which requires the corporate to have compliant tax lodgments combined with substantial compliance in the last 12 months.
Upon further investigation into the tax affairs of that client, we identified a history of late lodgements such that in this instance, there were several monthly lodgements for PAYG and GST lodged so late that it had triggered a right for the ATO to issue a Lockdown DPN. Accordingly, even though there was a plan to restructure the company through the voluntary administration process followed by a Deed of Company Arrangement, the corporate restructure process was not going to protect the directors from the ATO potentially seeking the shortfall from the directors through issuing a Lockdown DPN.
Lodge your tax lodgments on time
In short, lodge your tax obligations on time.
Directors of businesses in financial distress often make the mistake of not lodging because they are afraid of what the ATO might do next. Whilst this might be true, the Lockdown DPN regime can unexpectedly expose them personally by not complying with the lodgment regime. Reach out to the ATO and communicate with them proactively even if you cannot pay on time.
We have seen numerous articles in the media on the increase in DPNs that have been issued by the ATO in recent years. Where lodgments have not been made, or have been lodged out of time, directors may be liable for unpaid Company taxation liabilities. We at Cathro Partners strongly encourage all directors to ensure that all taxation lodgments are up to date, even if the liabilities cannot be paid, to avoid personal liability for unpaid Company taxation obligations and to engage with the ATO on outstanding liabilities.
Director undertook a Personal Insolvency Agreement ("PIA") process due to ATO not allowing the unapproved long-term payment tax plan to continue
In another matter a director had placed his company into liquidation on the grounds of insolvency. The liquidation process was completed some three years ago. There was an expired DPN which he had to deal with personally notwithstanding the liquidation of the Company.
The director had commenced paying a regular small amount each month towards the ATO debt, however, the ATO had not formally agreed to any payment plan.
The ATO subsequently sought to negotiate terms and required a shorter repayment period for the debt owing. This was beyond what the director could afford, and they met with us to discuss a potential personal insolvency agreement ("PIA").
Informal arrangements with the ATO are not binding on either party and all attempts should be made to formalise such arrangements.
In this particular case, the PIA was supported by creditors (including the ATO) and his personal debts were compromised allowing him to move forward without having the burden of having a long-term payment plan to satisfy the ATO.
Final Thoughts
It is clear the ATO has now returned to normal debt recovery procedures and seeking to enforce on expired DPN's.
As a business owner it is your responsibility to ensure compliance with tax lodgment obligations, with potentially severe consequences of failing to do so. As an individual, you should ensure that you are not exposed to the Lockdown DPN regime as it is likely to surface at any time. The ATO have sophisticated systems to identify non-compliance and you must expect them that they will eventually enforce.
If you or your client is already exposed to a Lockdown DPN or expired DPN then speak with a representative at Cathro & Partners on what options may be available to them. In addition to insolvency options there are also funding solutions that you or your client could access.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.