The ATO is now issuing out over 200 Director Penalty Notices (DPN) each day and accordingly it is time for a quick refresher course.
What are DPNs?
Company directors are responsible for ensuring that the company's tax and super obligations, including pay as you go withholding (PAYGW), GST and super guarantee charge (SGC), are reported and paid on time.
Where a company does not pay certain liabilities by the due date, the ATO can recover these amounts from a director personally as a current or former company director once a director penalty notice (DPN) is issued.
DPNs outline the unpaid amounts and remission options available. The ATO can recover the amounts by:
- issuing garnishee notices;
- offsetting any tax credits against the director penalties; and
- initiating legal proceedings against directors to recover the director penalty.
Where a company has more than one director the ATO may recover director penalties equally from all the directors. If an individual director pays the DPN in full they have the capacity to reclaim that money from the company and in the event the company can not repay the funds then the director can claim the funds from their fellow directors in equal shares.
There are two types of director penalty notices which the ATO can issue:
- traditional notices - 21 days to remit; and
- lockdown notices - immediate remittance.
Remittance of the director penalty
Unpaid PAYGW or GST reported to the ATO within 3 months of the due date may lead to the issuing of a traditional DPN and the penalty can be remitted by:
- paying the debt in full;
- appointing an administrator under sections 436A, 436B or 436C of the Corporations Act 2001 (the Act);
- appointing a small business restructuring practitioner under section 453B of the Act; or
- commencing a winding up of the company.
An unpaid amount reported later than 3 months after the due date may result in a lockdown DPN being issued and the only way to remit the director penalty is to pay the debt in full.
For SGC, remission of the DPN depends on when the ATO has been notified about SCG amounts. If the unpaid SGC is reported by the due date for the SGC statement, the penalty can also be remitted by taking one of the actions set out above.
If a valid DPN has been issued, and 21 days has passed since it was issued and none of the actions set out above have been taken then, the remittance provisions are no longer available to a company or director, and either the company or the director must pay the amount due to the ATO in full.
Where will the ATO send the Notice?
The ATO is only required to send a notice to the address of a director recorded by the Australian Securities and Investments Commission (ASIC), regardless of the currency of the address. The ATO may alternatively send a notice to a director at his or hers registered tax agent's address. Additionally, the DPN will appear on the company's ATO portal that tax agents and directors can access.
The ATO is able to issue a Lock-Down Director Penalty Notice, even after an Administrator or Liquidator has been appointed to a Company, if applicable taxation debts that were not reported to the ATO within three months of the Due Day remain unpaid.
What defences are available to a Director issued with a DPN?
There are only limited defences available to company directors issued a DPN these are:
- Illness or Incapacity (A director was unable to take part in the management of a company).
- All Reasonable Steps (All reasonable steps were taken by a director to comply with his or her obligations, or no such steps were )
- Superannuation Guarantee Charge - Reasonably Arguable Position (A director adopted a reasonably arguable interpretation of Superannuation Guarantee Charge legislation.)
What if I'm a Former or New Director?
Director Penalty Notices can be issued to former directors if the relevant debt was incurred during their term as a director.
Newly appointed directors have just 30 days to establish whether any existing ATO liabilities are outstanding and capable of being the subject of a DPN. If it is determined that there are relevant overdue liabilities, the new director must either:
- Resign as a director of the company.
- Appoint a liquidator, administrator to the company or a small business Restructuring practitioner.
- Be satisfied the company can pay the debt.
If any of the above do not occur, a new director may be subject to a DPN.
What if the Company has been deregistered by the ASIC?
This situation presents a significant problem as it is unlikely a director will be able to have the company re-registered with the ASIC within the 21 days available from the date the DPN is issued and consequently the only way to have a DPN remitted will be to repay the debt in full.
Are Payment Plans a Good Idea?
The ATO may request that the company or a director enter a payment plan to repay the outstanding debt as a way of resolving the DPN. Prior to entering in to a payment plan the following issues require consideration:
- A payment plan with the ATO does not cause the tax debt which was due and payable to cease to be due and payable, further there is a risk the Company may trade whilst insolvent and potential personal liability for directors due to insolvent trading may arise;
- In some circumstances, a director can become personally liable for ATO payments made under a payment plan, where they weren't previously liable for those underlying tax debts. If a Company enters a repayment for PAYG and Superannuation Guarantee Charge and is subsequently placed into liquidation, the Liquidator may be able recover monies paid under the payment plan as an unfair preference. Any amount repaid by the ATO for PAYG and SGC as an unfair preference can then be claimed by the ATO against the directors personally pursuant to Section 588FGA of the Corporations Act.
- Secured Payment Plan - The ATO may seek a Payment Plan that is secured against the assets of the Company or the Directors. As noted above professional advice should be sought.
- Accordingly, prior to entering a payment plan professional advice should be sought.
Are Traditional and locked down DPNs separate actions by the Tax Office?
The ATO may issue you with both a traditional DPN and a Lockdown DPN in the one notice for different debts. It is important to examine the DPN to understand potential personal liability. Below is an example of the column headings of a DPN which combines both a traditional and a Lock Down DPN:
Lock Down DPN
Amount the commissioner thinks is the unpaid amount of the company's unpaid liability
Amount the commissioner thinks is the unpaid amount of the company's unpaid liability not notified on or before the end of 3 months after the due day
Accordingly, it is important to pay particular attention to the notice you receive to determine the action required.
Garnishee On Director's Bank Accounts
Garnishees allow the ATO to compel payment from a third party that holds amounts due to, or on behalf of, a taxpayer that is indebted to the ATO. Once a Director Penalty Notice has been issued, and the 21 day period has expired, the ATO is entitled to seek a garnishee order against any third party that owes money to, or holds money on behalf of, the relevant director, including a director's personal bank accounts.
Key Takeaways for Directors
Some key takeaways for you to consider:
- Do not think the problem will go away if you ignore it!
- Pay your yearly ASIC fee and keep the data of your company current with their offices.
- Make sure you are lodging all required statements with the ATO within their due periods, even if you can't pay the debt straight away.
- Seek extensions where necessary, it is far better to contact the ATO to notify them of delays or request an extension than to wait it out
- Treat your position with care and diligence, know your obligations and potential liabilities. If you are new or resigning as director than ensure you are fully aware of all current and outstanding ATO liabilities.
- Consider the SGC and ATO liabilities of deregistered companies.
- Prior to entering a payment plan professional advice should be sought.
- We understand the ATO intends to increase the number of DPN's they are sending and when a director receives a DPN the 21 days from the day it is issued may not be sufficient to take the necessary advice to deal with the problem.
If a company cannot pay the debt due to the ATO under the DPN then the DIRECTORS MUST SEEK PROFESSIONAL ADVICE WITHOUT DELAY! The appointment of an administrator to a company that cannot pay the ATO debt subject to the DPN may result in an outcome that saves the company and directors money compared to paying the DPN debt in full.
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.