The Australian Taxation Office (“ATO”) has the power to pursue directors personally for certain liabilities incurred by a company, namely:
- ‘Pay As You Go’ tax (“PAYG”);
- Superannuation Guarantee Charge (“SGC”); and
- Goods and Services Tax (“GST”).
What is a Director Penalty Notice (“DPN”)?
A DPN is a tool that allows the ATO to collect any unpaid PAYG, SGC or GST liabilities owing by the company from the director of the company. You will usually receive a DPN via mail to the registered director’s personal address recorded with the Australian Securities and Investments Commission (“ASIC”) or (in some cases) the registered tax agent for the company. There are two forms of DPNs:
- a Non-Lockdown DPN; or
- a Lockdown DPN.
Non-Lockdown DPN
This form of notice gives the Director 21 days to take action before incurring the liability or penalty. The 21 day timeframe runs from the date of the notice, not when you become aware of it.
Lockdown DPN
This is a more severe variant of the Non-Lockdown DPN. In this scenario you are automatically liable, and you are generally unable to discharge that liability. Ultimately, once you are liable under a DPN the ATO will treat it as a normal tax debt, potentially commencing proceedings against you for the amount of the DPN debt. Once judgment has been obtained, the ATO may then bankrupt you personally and/or garnishee (take) funds from your personal bank account, wages and more.
Difference between Lock Down and Non-Lock Down DPN?
Non-Lockdown DPN
Generally, to receive this type of DPN your company has lodged its PAYG returns, Business Activity Statements and SGC statements as required within their respective due dates, however, the liabilities remain unpaid. This form of DPN will give the director 21 days to do one of the following:
- cause the company to pay its liabilities;
- place the company into liquidation or voluntary administration; or
- enter into a payment arrangement with the ATO.
Although not an ‘escape’ these options will hold personal liability ‘at bay’ for a time. The DPN would be remitted (cancelled) upon successfully commencing one of the above options. Failure to commence (and follow through) on one of these options will almost certainly result in the director being personally liable.
Lockdown DPN
As mentioned, this version of the DPN is more severe, you will not have the options above available and you are automatically personally liable for the company’s debts. To receive this type of DPN the company must have not lodged its relevant reports by the due dates and the relevant liabilities are unpaid. A DPN can be issued after a company has been placed into liquidation or voluntary administration.
Defences to a DPN
Although difficult, some defences do exist. By way of example:
- serious illness or incapacity;
- all reasonable steps were taken to ensure the company paid its liabilities or was wound up; and
- exclusively for SGC, reasonably arguable position.
Serious illness or Incapacity
This defence relies on the director being incapacitated to the point of being physically unable to take part in the management of the company, generally for a large portion, if not the entire period subject to the DPN.
Reasonable Steps
In general, this defence exists to allow for the situation where one director takes all possible steps and actions to be compliant and is blocked by other directors. For this to operate significant evidence will be required setting out what was proposed, and why it was not carried out.
Reasonably Arguable Position
Primarily this defence is for situations (such as the SGC) where it was reasonably arguable that there was a subcontractor, for example, who should not have received superannuation who is later determined to have been an employee and entitled to superannuation.
Key Takeaways
The key takeaways are that:
- Directors should ensure their details are correct as recorded with ASIC so no DPN is missed;
- all relevant reporting with the ATO should be lodged by the due dates even if it cannot be paid (to avoid a Lockdown DPN); and
- every director needs to maintain a deep understanding of their reporting obligations.
If you have any concerns regarding your obligations or a DPN (or possible DPN) against you, please contact one of our experienced solicitors on (07) 3186 8669 or click on the “Book a Consultation” button on our website to book in a free 15 minute consultation with one or our experienced solicitors so that we can discuss the best way to protect you or your business.
Aleksandra Moore
Associated Director at Moore Lawyers