Your Complete Guide to a Director Penalty Notice

In March 2022, the Australian Tax Office (ATO) began their debt recovery process by issuing Director Penalty Notices to directors of company’s who have not met or reported their tax obligations. One of the most important duties of a Director is to ensure that all tax obligations are met. This includes PAYG withholding, GST, and superannuation contributions. Director Penalty Notices (DPN) are issued by the ATO to company directors for the purpose of recovering debts. This includes any unpaid, unreported, or falsely reported debts and contributions. These are among the most common signs that a company is facing the threat of insolvency. Moreover, if a company fails to meet its tax obligations by the due date, company Directors may be held personally liable for the amounts payable.

What is a Director Penalty Notice (DPN)?

A Director Penalty Notice (DPN) is a notice issued from the Australian Tax Office (ATO) to the director potentially making them personally liable for the company’s tax debt.

The director penalty notice is issued when the company has not paid and/or reported their tax obligations or has significant debt.

The ATO may issue a director penalty notice when the taxpayer fails to meet their tax obligations. This is in relation to Pay As You Go, Superannuation Guarantee Charge and Goods and Services Tax.

If you have received a director penalty notice, contact our expert insolvency practitioners today for your free consultation.

What are the different types of Director Penalty Notices?

There are two different types of Director Penalty Notices that are issued by the ATO. They are the 21-Day DPN and the Lockdown DPN.

21-Day DPN

As suggested by its name, the DPN gives company Directors 21 days to act accordingly with respect to tax debts owed. It is the most common type of DPN issued and Directors can avoid personal liability provided they do one of the following:

Ensure that the company pays the debt owed by the nominated date

Arrange a payment plan with the ATO to pay off the debt

Put the company into Voluntary Administration

Put the company into Liquidation.

It is imperative to note that the 21 day period begins from the date of issue listed on the DPN and not the date it was received. A failure to comply may result in the ATO commencing proceedings against Directors personally.

Lockdown DPN

Recently the ATO have begun to issue lockdown director penalty notices. They are issued to Directors when a company has failed to meet its lodgement requirements. Business Activity Statements (BAS) and Income Activity Statements (IAS) must be lodged within 3 months of the due date, with Super Guarantee Charge (SGC) due within one month, and, 28 days of the end of quarter during which the contribution relates to.

The reason for the ‘lockdown’ name is that the penalty issued by such a DPN can only be dealt with by paying the debt in full.

How is a Director Penalty Notice Given?

A director penalty notice is given by leaving it at, posting it to, the address held on the ASIC current extract for the residence of place of business.

It is very important that you keep your company records up to date with ASIC because a director will be deemed to have been given the notice if sent to an old address.

Who does a Director Penalty Notice apply to?

The ATO will issue a director penalty notice to all directors of the company.

In some situations, a previous director who was the director when the company incurred the tax debt can also be issued with the director penalty notice. All current directors of the company will be issued with a director penalty notice.

New directors of a company can be issued with a director penalty notice after 30 days of becoming the director. This can only occur if they became a director after the due date of the company’s tax debt.

Why will I receive a Director Penalty Notice issued by the ATO?

A Director Penalty Notice is issued by the ATO. In March 2022, they continued their tax debt recovery processes.

Any taxpayer who is not actively working to resolve their outstanding lodgements and tax liabilities with the ATO may be issued a Director Penalty Notice.

The ATO may issue a Director Penalty Notice if the company is unwilling to work with the ATO to find a resolution. Directors may be issued a DPN if they have defaulted on their agreed payment plans with the ATO or have simply taken no action to resolve the company’s tax debt.

Can the ATO issue a DPN after placing my company into liquidation or administration?

One of the key features of a Lockdown director penalty notice is that placing a company into administration or liquidation may not avoid liability. The ATO has legislative power to issue director penalty notices during or after companies have entered voluntary administration or liquidation. The ATO may estimate company debts owed for PAYG, GST, and superannuation. They will then use these estimates to issue Director Penalty Notices.

What is a Director Penalty?

A Director penalty is the amount that a Director is personally liable for. The penalty is equal to the amount that the company has not paid. It is a separate debt to that owed by the company and both exist at the same time. For example, if the company debt (comprised of PAYG, GST or SGC) is equal to $50,000, the director penalty results in the director being personally liable for the $50,000 debt.

What is Director penalty parallel liability?

Despite having the ability to chase both the company and Directors personally for unpaid debts, the ATO is not allowed to collect the debt twice. Legislation prescribes that a Director penalty operates in parallel to the liability owed by the company and other Directors who have received a DPN related to the same debt.

If a Director makes part payment or payment in full of their DPN, the company’s liability will reduce by that amount as will the penalty owed by the other Directors. Similarly, any payment made by the company relating to tax debt will result in Director penalties being decreased by the equivalent amount.

Are directors personally liable for PAYG?

No. Directors only become personally liable for any outstanding PAYG if a DPN is issued due to the outstanding lodgements and tax debt. If that occurs, then the Director automatically becomes liable for a penalty equal to the unpaid amount. As mentioned earlier, there are several options available to the ATO for the purposes of penalty payments including withholding a tax refund. The ATO has the power to pursue Directors to the extent where they face personal bankruptcy.

How to avoid getting a Director Penalty Notice?

The easiest way to avoid getting a Director Penalty Notice is by developing a series of good habits. These will ensure that the company meets its tax commitments on time - preventing it from being in a position where notices of any kind are issued. Directors should consider the following:

• Financial Position: As a Director you should always be aware of the company’s financial position. If your company is having trouble meeting financial commitments, it is likely that tax commitments are not being paid by the due date.
• Tax Commitments: This included monitoring PAYG withholding, GST and super contributions. In addition, Directors should ensure that forms such as quarterly BAS and IAS are lodged on time.
• Company Details: This may sound silly but it is essential that the ATO always has the latest company information including address and contact details. This is crucial as claiming you did not receive a notice is not a good enough excuse.
• Be Proactive: If a Director recognises that the company is unable to meet financial commitments such as PAYG withholding, it is their duty to take action which may include employing expert business advisory services.

What happens if my Director Penalty Notice (DPN) has expired?

If you receive a director penalty notice (DPN) you will notice, there is a specific date where an action must be taken by. The DPN will list possible actions (or options) you may take to settle your outstanding ATO debt. These can include:

1. Entering liquidation,
2. Entering voluntary administration,
3. Agreeing to a payment arrangement with the ATO
4. repay the debt in full.

If this date has now passed, your options then change.

To avoid personal liability, the outstanding debt must be paid. This may not be an option for some if the company has ceased trading and unable to repay the debt. If you have exhausted these options and are not in the position to personally repay the debt, then your options are as follows:

• Enter debt negotiation with the ATO
• Enter a debt agreement under Part IX of the Bankruptcy Act 1966
• Enter a personal insolvency agreement under Part X of the Bankruptcy Act 1966
• Enter bankruptcy

Letting your DPN expire is not ideal, but we understand that sometimes these situations can arise. If your DPN has reached its expiry date, get in contact with us as soon as possible and together with our insolvency experts we will work with you to find the right solution.

Possible Defences and Safe Harbour Provisions

The ATO outlines a series of statutory defences for DPNs including:

• Non-involvement: You did not take part in the management of the company during the nominated period due to illness or another reasonable reason.
• Reasonable Steps: As a Director you took all reasonable steps to ensure the company was compliant
• Attempted Payment: Any Director who tried to get the company to meet its tax obligations but failed due to a disagreement with other directors may be excused from being liable.

For expert insolvency advice and how to deal with Director Penalty Notices, contact Australian Debt Solvers for a free consultation.