With many businesses still suffering from the financial fallout of COVID-19 and the ATO already tightening up debt recovery in early 2021, directors are at a higher risk of being made personally liable for outstanding tax debts and receiving a director penalty notice (DPN).
A director penalty notice is a formal document that allows the ATO to pursue directors personally for their company’s unpaid tax debts – whether they’ve been reported or not. Essentially, it lets them go behind the corporate structure so they can chase payment.
Are you at a risk of receiving a director penalty notice? Here’s what you need to do
Tax debts directors can be held liable for include pay-as-you-go (PAYG) withholding, superannuation guarantee (SG) liabilities and, as of 1 April 2020, unpaid Goods and Services Tax (GST). The latter includes luxury car tax and wine equalisation tax.
There are two main types of director penalty notice the ATO can issue:
- 21-Day DPN: Issued if outstanding tax is reported but unpaid
- Lockdown DPN: Issued if outstanding tax is reported late or unreported, and unpaid
A Director Penalty Notice is one of several recovery options available to the ATO. Other options include garnishee notices, offsetting tax credits against the director penalties or initiating legal proceedings against your company to recover them.
Receiving a director penalty notice
To avoid being issued a Director Penalty Notice, directors must pay close attention to their company’s reporting to ensure they don’t get caught out. Not paying attention can cause ATO debts to quickly rise.
Even if you rely on your accountant or bookkeeper to prepare and lodge your company’s BAS and pay super each quarter, you need to ensure your returns are lodged and any debt is paid, or put on a payment arrangement.
If you’re behind in reporting and paying your tax obligations, whether as a result of mismanagement or simply because you’re struggling financially, a director penalty notice may arrive in your letterbox.
This address it reaches you at will be your personal address registered with the Australian Securities & Investments Commission (ASIC) or the last one the ATO has on record. So always make sure yours is up to date.
A Director Penalty Notice outlines the amount of tax debt owed. In the case of lockdown DPNs, if the respective BAS or super return hasn’t been submitted, this amount is based on a reasonable estimate by the ATO.
Your Director Penalty Notice will also include the remission options available to you as director. In other words, what you need to do to satisfy the demand.
Receiving a Director Penalty Notice can cause significant stress. Not only can it ramp up the pressure on what may already be a difficult financial situation, but it can also be, at worst, a precursor to losing your family home.
How to respond to a Director Penalty Notice
When you receive a director penalty notice, you have 21 days to respond to it. Importantly, the 21 days begins from the day the letter is posted to you, not the day you receive it.
Your choices of response are limited by the state of your tax affairs:
- 21-Day DPN – If your unpaid BAS debt is reported within three months of the due date, or your Quarterly SGC Statement is lodged by the due date, you have three main options open to you:
- Lockdown DPN – If your unpaid BAS debt is not reported within three months of the due date, or your Quarterly SGC Statement not reported by the due date, you only have one option: to pay the outstanding amount in full.
Often a director penalty notice may include both types of debt listed on the one notice. For these notices, the above options apply separately to each type of debt.
New directors can also become personally liable for a company’s debts, even if they weren’t a director at the time the debt was incurred. To avoid personal liability, new directors have three months from the date of their appointment to pay the debt, cause the company to enter an insolvency appointment as discussed below, or resign as director.
If you enter into a satisfactory arrangement to pay the debt, the ATO won’t seek to recover the penalties from you personally. However, they may offset your personal tax credits.
Disputing a director penalty notice
There are some defences you can use to deflect your liability for director penalties and prevent any legal proceedings beginning. Known as statutory defences, these are legitimate reasons why you may have been unable to meet your tax obligations.
Statutory defences against a DPN include:
- You did not reasonably take part in the management of your company during the period in question due to illness or other circumstances
- There were no reasonable steps you could have taken to pay the outstanding amount, appoint an administrator or place your company into liquidation
- You reasonably attempted to apply the Superannuation Guarantee (Administration) Act 1992
A Director Penalty Notice defence must be submitted to the Commissioner in writing and include all supporting documentation. The defence must be proved across the entire period in question for which the director was under obligation.
However, a strict view is taken in assessing these defences. Importantly, not receiving the director penalty notice or non-participation in the management of the company at the time is not enough to rebut a director penalty notice liability. You, therefore, need to take all reasonable steps as a director to ensure your company complies with its obligations.
While you have options when you receive a director penalty notice, the best approach is avoiding the ATO putting you on the director penalty notice list. This means taking steps right now to ensure your company’s BAS and super obligations, and business finances, are in order.
If you’re still in a post-pandemic financial aftershock and trying to get back on track but struggling to pay your tax debts, make sure you’re at least reporting them to avoid a lockdown director penalty notice and to give yourself more options.
The good news is the new small business restructuring process is now here to help businesses like yours.