An update on director personal liability for company tax debts
I thought it was time for an update on the issue that triggers the most calls to our help line, company tax debt and specifically Director Penalty Notices. You’ll be aware that new laws were introduced in June 2012 giving the ATO very significant new powers to pursue directors personally. We knew the Tax Man had the shiny new big club – the question has been, whether he would use it. Here is an update on what we are seeing.
A Refresher on the old and new DPN Laws
You will be aware to some degree of the nature of the director penalty regime but, in case the details have escaped you, here’s a refresher. The ATO can pursue the directors of a company for unpaid PAYG or Superannuation Guarantee debt in some circumstances. They do this by sending a Director Penalty Notice (DPN) to the director. Those notices come in two forms:
- The traditional (and still valid) 21 Day DPN
Where a company has a PAYG or Super Guarantee Debt, then the ATO can issue a DPN giving the director 21 days’ notice of the impending personal liability. As long as the director causes the company to pay the debt or wind the company up in those 21 days, the director will avoid personal liability. So this DPN applies where the company has been lodging its BASs on time but hasn’t paid the debt.
- The new “Lockdown” DPN
In June 2012, new DPN laws were introduced. These laws apply where a company has not lodged its returns on time. The criterion used is whether the BAS return (for PAYG) or Superannuation Guarantee Charge (SGC) statement (for super) was submitted within 3 months of its due reporting date. If the debts were not properly reported, the ATO can use a harsh version of the DPN that is commonly referred to as a “Lockdown DPN”. The Lockdown DPN informs the director that they are already liable for the amount on the DPN and even a liquidation will not help them to avoid liability.
So what have we been seeing?
When the ATO’s powers were expanded in June 2012, there were fears of an avalanche of Lockdown DPNs. It was a valid fear as we would expect that there are literally thousands of companies that lodge BAS returns late and, despite many companies not paying Super contributions for their employees, the lodgement of a Super Guarantee Charge form would be very rare. Both events lead to automatic personal liability. So the potential targets of the new DPN laws are many. But we have not seen the avalanche. Of course, the ATO can store up the ammunition and launch at any time in the future as any breach is not rectifiable except by payment of the debt.
We receive a lot of phone calls from concerned directors and their accountants. We also conducted a straw poll of professional colleagues on their recent DPN experiences. Here is what we found:
- There is no material increase in 21 Day DPNs and there has possibly been a decline in frequency;
- The ATO is using the new Lockdown DPNs but they appear to be reserved for “recalcitrant” debtors – that is, the ATO does not seem to be using them as a standard Demand in the debt recovery process;
- It is common for the ATO to send both a 21 Day DPN and a Lockdown DPN in the one envelope.
So if your client receives what looks like a Lockdown DPN, make sure they check all documents in the envelope carefully because there may be an avoidable portion that a company liquidation will help to remit.
But beware of a new trap
We came across an interesting case that highlights a potential trap with the new legislation.
We are aware that some Accountants may have suggested to their clients that a safe practice where a company is struggling to pay its BAS debt is for the company to lodge a nil or low BAS, hence complying with the legislation and preventing automatic liability under a Lockdown DPN. That is not a good idea!
We received a call from a director that had received a Lockdown DPN. He said his accountant had submitted his BAS on time initially, but subsequently made an amendment to the BAS outside the 3 month reporting period. The ATO then issued a Lockdown DPN claiming the PAYG debt was not properly reported. The director tried to appeal but was told the policy is that in a situation where a BAS is amended, the reporting date is taken to be the date of amendment, not the initial date of submission. We have not been able to independently verify these circumstances but it should sound a warning for caution when amending a BAS that can’t be paid.
Putting all that together – what’s our current advice?
In brief, the essence of our advice from two years ago still stands, which is, if your client:
- receives a 21 Day DPN, they should act…. within 21 days to either pay the debt or put the company into Voluntary Administration or Liquidation;
- cannot pay their PAYG or Super debt, make sure they still report on time – with the new addendum being – report accurately so that a future BAS amendment can be avoided;
- has an existing PAYG or Super debt that is unpaid and unreported for three months after the due date then you should call us immediately to establish whether the director is already personally liable and whether a liquidation may reduce the chances of the director receiving a Lockdown DPN.