With over $34 billion of collectable tax debt being owed by small businesses, the Australian Taxation Office (ATO) has been increasing its efforts to collect unpaid taxation liabilities.
Part of the ATO’s key deliverables under its 2023–2024 Corporate Plan includes expedited stronger actions and firmer consequences to strengthen debt prevention and recovery, particularly where taxpayers don’t engage.
ATO Debt Recovery Ramps Up
The Director Penalty Notice is one of the ATO’s main debt recovery tools. It’s being utilised with increasing frequency, with over 20,000 being issued in the 23–24 financial year. Further, at the end of this year, the ATO will be significantly shortening the period between collection steps – it may issue a DPN less than 3 weeks after a first demand letter for unpaid tax is received.
Given the increase in the ATO’s use of DPNs, it’s important and timely to understand what they are, what must be done to avoid personal liability, what options are available in response to a notice, and the steps that can be taken to avoid a DPN being issued.
What is a Director Penalty Notice?
A Director Penalty Notice is a notice sent by the ATO to a company director. A DPN can make a director personally liable for 3 types of tax debt:
- Pay As You Go Withholding (PAYGW)
- Goods and Services Tax (GST)
- Superannuation Guarantee Charge (SGC).
The ATO’s primary method of issuing DPNs is by post to the director’s address recorded on the ASIC database or the tax agent portal. It’s important to make sure these are up to date.
A Director Penalty Notice can cover debt incurred by a director before their appointment, during their tenure as director, and even after resignation to the extent the first withholding event in the reporting period occurred prior to the resignation.
Understanding the Different Types of DPNs
There are two types of DPNs that may be issued by the ATO to the company’s director, and it’s important to understand the difference and determine which applies because this impacts the options available to the director.
Non-Lockdown DPN
A non-lockdown DPN is issued when a company’s tax debts are unpaid and:
- PAYGW or GST debt was reported within 3 months of the due date for lodgement; and/or,
- SGC was reported by the due date of the SGC statement (ie. one month and 28 days after the end of the relevant quarter).
If the ATO has issued a non-lockdown DPN, a director has 21 days from the date it was issued to avoid personal liability for the debt by either:
- paying the debt in full; or
- appointing to the company:
- a Small Business Restructuring practitioner;
- a Voluntary Administrator; or
- a Liquidator.
Lockdown DPN
A lockdown DPN can be issued by the ATO when a company’s tax debts are unpaid and not reported within the timeframes outlined above.
If a lockdown DPN has been issued, a director can only avoid personal liability if they pay the debt in full within 21 days from the date of the DPN. Importantly, a director of a company that has already been placed into small business restructuring, voluntary administration, liquidation or deregistration can still be issued with a lockdown DPN.
Combined DPN
The ATO may issue a DPN that includes both non-lockdown and lockdown components. It is important to read the DPN carefully to understand what the quantum of lockdown and non-lockdown liabilities.
Failing to Comply with a DPN
If a director fails to comply with one of the relevant options within 21 days from the date of the DPN, the director will become personally liable for the unpaid tax and the ATO can commence recovery proceedings against the director personally.
Importantly, entering a payment arrangement with the ATO within the 21-day period is NOT sufficient to discharge the DPN. Once the 21-day period lapses, the director will be personal liability for the unpaid tax, and the director can be pursued if the company defaults on the payment plan.
Appointing an Insolvency Practitioner to a Company
It’s important to act quickly if the DPN is non-lockdown and seek advice as soon as possible on whether a small business restructure (SBR), voluntary administration (VA) or liquidation (Liq) is the best option for the company and the director’s personal financial position.
Each option has different legal consequences (and options) for a company and director. Ideally the company’s accountant, legal advisor and a potential insolvency practitioner will work together to help advise on the best option and outcome.
How to Avoid a Director Penalty Notice
The most effective action to prevent a DPN is to avoid being in the position where the ATO has the right to issue one. That is, prevention is better than cure. Accordingly, company directors should:
- stay familiar with the company’s financial position and monitor that lodgements are made before the relevant date (even if the company can’t pay the debt due);
- if having difficulties paying the tax debt, communicate early with the ATO;
- If needed, enter into a payment arrangement with the ATO and ensure compliance with its terms;
- prioritise payment of the company’s superannuation (the ATO is especially focusing on this unpaid tax); and
- seek professional advice as early as possible if the company encounters financial problems.
Although there are potential defences available to a director issued with a DPN, they apply in very limited circumstances and will only avoid personal liability for the specific period where the criteria apply. Given it is not possible to have a defence determined by the ATO within the 21-day compliance period it is important to get advice on whether to appoint an insolvency practitioner.
DPN Takeaways & Seeking Help from an Insolvency Lawyer
As the ATO continues to utilise DPNs as its common means of recovering unpaid taxation liabilities against directors personally, it’s vital that directors understand how to avoid DPNs, the personal implications and potential relief available in responding to such a notice. The most important thing is that directors act swiftly given the time-critical consequences and seek advice from an insolvency lawyer to understand the options available in responding to a DPN.
BlueRock’s Melbourne-based insolvency lawyers can assist with advising company directors (and their accountants) as to the options available, before setting an effective strategy in place. Submit the form below and we’ll be in touch to arrange a consultation.
