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Director Penalty Notices –The ATO is Coming Out of Hibernation

Written by Alice Ruhe

After what seems like a prolonged grace period allowed by the Australian Taxation Office (“ATO”) to take into account the ongoing distress felt by businesses as a result of floods, fires and the COVID19 pandemic, it appears the process has again commenced to recover the tens of billions of dollars owing to it by small and medium businesses.

Whilst there are numerous methods the ATO can utilise to collect outstanding amounts, we thought it would be a good time for a refresher on Director Penalty Notices (DPN’s), given the alerts being issued by the ATO in relation to same.

ATO Resumes Collection Efforts

A Closer Look at Directors' Responsibilities in Company Debts to the ATO

Many business owners choose to run their businesses through a company structure, due to the limited liability it affords the directors. However, this doesn’t mean that company directors cannot be made personally liable for certain debts incurred within the company. Today, we are discussing the personal liability that can arise when companies fail to pay outstanding amounts to the ATO with respect to GST, PAYG and superannuation.

If a company fails to meet its obligation to pay GST, PAYG and superannuation, the company directors can be held personally liable by the ATO for these amounts. The liability is created automatically, meaning no specific notices need to be issued or steps need to be taken by the ATO before the debt becomes an amount payable by the director.

ATO's Automatic Enforcement for Unpaid GST, PAYG, and Superannuation Obligations

Key Circumstances Explained

Directors can be held personally liable for outstanding GST, PAYG or Superannuation obligations in the following circumstances:-

They were a director of the company when the company failed to pay the withheld amounts when they were due; and/or
They became a director after the date the payment was due and if they are still a director 30 days after the amount was due but is still unpaid.

Director Penalty Notices (DPNs) are issued by the ATO to put the directors on notice that it intends to pursue a claim against the director personally and, in some instances, provides options for the directors to prevent enforcement of the personal liability.

ATO's Notice of Personal Liability and Options for Directors' Defence

There are two types of DPNs that can be issued by the ATO, Non-Lockdown and Lockdown DPNs.

A Non-Lockdown DPN might be issued when a company’s BAS and IAS have been lodged within 3 months of their due dates, and their SGC Statements have been lodged within one month and 28 days after the end of the relevant quarter. In this instance, the ATO may provide directors with options that need to be undertaken within 28 days of the notice being issued in order to prevent the directors becoming personally liable for the outstanding amounts. These options include:

- Payment of the debt in full

- Appointing an Administrator to the Company

- Appointing a Small Business Restructuring Practitioner to the Company

- Beginning to wind the company up / Appointing a liquidator to the company

Understanding Non-Lockdown Director Penalty Notices (DPNs)

There are some instances where associates of a company director may also be made personally liable to pay outstanding PAYG Withholding amounts. Associates can include (but are not limited to) relatives, partners, a spouse, or children of the company director. In order for an associate to be deemed liable, however, the Commissioner must determine that the associate knew, or could reasonably be expected to have known, that the company failed to pay the outstanding amounts. An associate should not be liable if they can demonstrate they:

- Took reasonable steps to influence the director to make the company notify the Commissioner about the amount withheld

- Took reasonable steps to influence the director to make the company pay the withheld amounts to the Commissioner

- Took reasonable steps to influence the director to appoint an administrator, or have the company wound up or appoint a small business restructuring practitioner;

or

Reported that the company had not paid the amount withheld to the Commissioner or other relevant authority.

If a DPN is received, it is imperative that advice is immediately sought from a qualified professional to ascertain what options may be available, and how best to move forward.

Understanding Personal Liability for Associates of Company Directors

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If you have any queries regarding Director Penalty Notices, or Insolvency generally, please feel free to contact me at aruhe@smbadvisory.com.au

This article is intended to provide general information only in summary format on relevant issues. It does not constitute legal or financial advice, and should not be relied on as such.

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Implications and Options for Directors Facing Unpaid Tax Obligations

If the company’s GST, PAYG and SGC lodgements are not made within the above time periods, a Lockdown DPN may come into play. In this instance, the only option to avoid becoming personally liable for the outstanding amounts is to pay the debt in full. At this stage the company’s directors may need to seek their own advice with respect to personal insolvency options.

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