What is a Director Penalty Notice?
A Director Penalty Notice (“DPN”) is a Notice that the Australian Tax Office (“ATO“) can send a director that can make that director personally liable for two types of tax debts of a company – Pay As You Go (“PAYG“) and Superannuation Guarantee Charge (“SGC“) liabilities.
The DPN regime is set out in Division 269 of Schedule 1 of the Taxation Administration Act 1953. There are two types of Director Penalty Notices. The first is the traditional Director Penalty Notice which gives a director 21 days to take certain actions to avoid personal liability. The second type of DPN, often referred to as a “Lockdown DPN”, can make a director automatically personally liable for PAYG and SGC if company tax returns are not lodged on time – there is no opportunity to avoid that liability once the DPN is served on the director.
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- Can a director be made personally liable for company tax debts by a DPN?
- What is the ATO’s strategy regarding DPNs?
- What is a 21- Day Director Penalty Notice?
- When does the 21 days run from?
- What is a “Lockdown” Director Penalty Notices?
- Could I get both a 21-Day DPN and a Lockdown DPN?
- Is there a simple rule to avoid being personally liable under a Director Penalty Notice?
- What are these Superannuation Guarantee Laws?
- Will a Director Penalty Notice apply to me if I am a new director?
- If the company hasn’t done its tax returns how can the ATO issue a Director Penalty Notice?
- Are there any defences for a director who receives a Director Penalty Notice?
- What if it was my spouses company and I was just helping by acting as the director?
- Is it a defence if I tried, but failed, to get the company to pay the tax debt?
- Can I avoid liability under a Director Penalty Notice by claiming I didn’t receive it?
- Will the ATO send the DPN to all directors?
- What if only one director pays the DPN?
- What happens if I get a DPN and don’t pay the ATO?
- Are there extra defences regarding DPNs for superannuation guarantee charge?
- What are the simple things to do to avoid getting a DPN?
Can a director be made personally liable for company tax debts by a DPN?
Yes. As a director, the main way to become personally liable for company tax debts is as a result of the Director Penalty Notice laws. The laws were significantly strengthened in June 2012 and the new laws were designed to, and should, change the way directors view company tax debts. It is now much easier to become personally liable. The 2012 laws have greatly complicated an already difficult area of the law, but their prime objective is to make directors personally liable for some company tax debts.
What is the ATO’s strategy regarding DPNs?
The ATO is open about its approach to non-payment of PAYG and Superannuation. It has issued a statement called “Firmer approach to debt collection” where it confirms its aggressive approach to non-complying businesses regarding unpaid taxes. The ATO has stated it is particularly targeting companies that:
- default on payment arrangements repeatedly;
- avoid tax liabilities by liquidating companies then setting up new companies, often called “phoenix activity”;
- are showing increasing debt with limited ability to pay the tax debt;
- actively avoid contact with the ATO.
What is a 21- Day Director Penalty Notice?
Director Penalty Notice laws have been around for many years and the most common Notice gives directors 21 days to act. In brief, if a company has outstanding Pay As You Go or Superannuation Guarantee Charge debts then the ATO can send a Director Penalty Notice to a director giving that director 21 days to:
- cause the company to pay the debt; or
- put the company into Liquidation; or
- put the company into Voluntary Administration; or
- come to a payment arrangement with the ATO.
If you’ve received a Director Penalty Notice with a 21-day action period, then a director, not surprisingly, should seek advice and act within the 21 days!
When does the 21 days run from?
The 21 day period runs from the date of the DPN Notice. So to be clear, it does not run from the date you receive it, it runs from the date that the ATO send it.
What is a “Lockdown” Director Penalty Notices?
Laws were passed in June 2012 that dramatically increase the scope of the DPN laws and director personal liability. In brief, the laws:
- Expand the DPN regime to include Superannuation payable to employees (“SGC”);
- Make directors automatically personally liable if PAYG or SGC amounts remain unpaid and unreported three months after the due date for lodging a return and a director cannot cause their director penalties to be remitted (i.e. cancelled) by placing their company into voluntary administration or liquidation;
- Restrict access to PAYG withholding credits for company directors and their associates where the company has failed to pay withheld amounts to the Commissioner of Taxation – this change applies to amounts withheld during the 2011-2012 and later income years;
- Have effectively backdated the director personal liability for existing PAYG liabilities if the amounts are already unpaid and unreported three months after their due date.
Could I get both a 21-Day DPN and a Lockdown DPN?
Yes, the old DPN laws still apply so you may get a DPN that gives no opportunity to have the penalty remitted, being a Lockdown DPN, or one that gives 21 days in which to act and avoid personal liability. In practice, the ATO will often issue both a Lockdown DPN and a 21-Day DPN at the same time.
Is there a simple rule to avoid being personally liable under a Director Penalty Notice?
Yes. The DPN laws are designed to change the behaviour of directors. In the past, directors tended to leave tax debts at the bottom of the payments pile. That was often achieved by directors simply not complying with tax lodgement and payment requirements – BASs were not lodged on time and tax debts were often the last to be paid. That is now a very bad approach. The two simple rules are:
- Get your company tax returns up to date and lodge them – if you do that you cannot be liable under a Lockdown DPN;
- If you get a 21-Day DPN – get advice and act within 21 days.
And to be clear, if the company can’t pay the debt due under a BAS for PAYG or a Super debt, lodge the return anyway, otherwise you will be personally liable for the debt.
What are these Superannuation Guarantee Laws?
Under Superannuation Guarantee law, if an employer is not able to meet their superannuation obligations by the due date for payment, they are required to lodge a “Superannuation guarantee charge statement – quarterly (NAT9599)” with the ATO. With that legislation it is important that a company lodge a NAT9599 with the ATO within 3 months of the due payment date or its directors will be automatically personally liable for the company’s Superannuation Guarantee Charge (SGC) liability. It should be noted that SGC is made up of the shortfall in Super payments plus interest (10% pa) and a processing fee (currently $20 per employee, per period). So unlike PAYG where a director is made liable for the shortfall only, for Super the director is liable for the shortfall plus interest and fees.
Will a Director Penalty Notice apply to me if I am a new director?
Not straight away. A new director of a company is liable for PAYG and SGC debts but not until 30 days after they become a director. That period is designed to give the new director time to assess if there is a backlog of PAYG or SGC and gives time for them to act, or resign.
If the company hasn’t done its tax returns how can the ATO issue a Director Penalty Notice?
If returns are not lodged, and so the ATO doesn’t know the specific amount that a company owes for SGC liabilities, then the ATO can estimate those amounts and issue the DPN using those estimates.
Are there any defences for a director who receives a Director Penalty Notice?
A director has a defence in relation to a Director Penalty Notice if the director had an illness, or some other good reason, that prevented him or her participating in the management of the company, or if the director took all reasonable steps to ensure the company complied with its tax obligations.
What if it was my spouses company and I was just helping by acting as the director?
There are provisions that allow as a defence that a director was not actually involved in the management of the company and it was reasonable for the director not to be involved. However, note that this is a hard defence for a director to establish. The tax laws state that the defence is only valid if it was “unreasonable to expect the director to take part due to illness or some other good reason”. Simply not being involved is not a defence – there has to be a good reason.
Is it a defence if I tried, but failed, to get the company to pay the tax debt?
Sometimes. It may be the case that there was a director dispute and a director tried to get the company to comply with its tax obligations but the other director caused that to not happen. In such cases, the director would need to show that they took reasonable steps to ensure that the company would comply with its tax obligations.
Can I avoid liability under a Director Penalty Notice by claiming I didn’t receive it?
Unlikely. There have been court cases where directors claimed they did not receive the DPN. The Courts accepted the ATO evidence that the ATO had sent the DPNs to the correct address. If a director has moved address, and failed to update their addresses with the ATO, then that is a problem for the director rather than the ATO. Further, the ATO can serve a DPN on a director by sending the DPN to the company’s tax agent’s address.
Will the ATO send the DPN to all directors?
What if only one director pays the DPN?
There will sometimes be a dispute between directors and only one of the directors will pay the DPN. In such cases, the Taxation Administration Act 1953 (section 269-45) provides a right of indemnity which allows the director who paid the DPN to then recover the amounts paid against the company and any other director that was equally liable.
What happens if I get a DPN and don’t pay the ATO?
If a DPN is issued to a director and that director doesn’t pay the amount due then the ATO is able to pursue that director personally for the company tax debt. So the ATO has a range of options which could include issuing a Garnishee Notice against that director’s personal bank accounts. Ultimately, the ATO can pursue the director until that director becomes a Bankrupt.
Are there extra defences regarding DPNs for superannuation guarantee charge?
Yes. Where a DPN is for SGC, a director may have a defence that the company took “reasonable care” to pay its Superannuation liability but it remained unpaid for some good reason. The SGA Act allows a 60-day period to raise a defence against the recovery of all director penalties by methods other than court proceedings. If a director wanted to rely on this defence, it would still be best to raise the defence prior to the DPN expiring.
What are the simple things to do to avoid getting a DPN?
The most effective action to avoid a DPN is to avoid the position where the ATO has the right to issue a DPN. That is, prevention is better than cure. The ATO would also agree with this approach as the prime purpose of DPNs is to encourage directors to ensure a company lodges returns and takes action if a debt can’t be paid. Hence, the top actions to avoid receiving a DPN are:
- Stay familiar with the company’s financial position and monitor that quarterly and monthly BAS Returns are lodged on time (do this even if the company can’t pay the debt due);
- Make sure your address details with ASIC and the ATO are current so you avoid the situation where you don’t receive Notices;
- If the company can’t pay the amounts due for PAYG and Superannuation contact your accountant or us for advice.