The Two Kinds of DPNs for Errant Directors
Directors who fail to ensure payment of company PAYG tax and employees’ superannuation should expect to receive a Director Penalty Notice (DPN) from the Australian Taxation Office (ATO).
The ATO is taking a hard line against companies that fail repeatedly to report on time, default on agreed terms for meeting tax obligations, or continuously incur debt with no apparent prospect of reducing liabilities.
Legislation now enables the ATO to clamp down on so-called “phoenix” activities – that is the ATO can recoup money and sanction Directors who transfer assets from an indebted company to a new company to avoid paying creditors, tax, or employee entitlements. These Directors leave debts with a company in terminal financial difficulty, often placing it into administration or liquidation with no assets to pay creditors.
DPNs of two kinds are the ATO’s response to non-compliant companies and errant Directors.
Lockdown and non-lockdown DPNs
There were amendments in June 2012 by way of Division 269 in Schedule 1 of the Taxation Administration Act 1953 (TAA) empowering the ATO to issue two kinds of DPNs.
A standard non-lockdown DPN is issued to every Director of a company with longstanding liability arising from non-lodgment of Business Activity Statements (BAS), and/or Installment Activity Statements (IAS) – the debt consisting of Pay as You Go (“Withholding”) liabilities (PAYG), and/or Superannuation Guarantee Charges (SGCs).
A Director who receives one of these DPNs must (providing reporting options have been met), within 21 days of receiving the notice, exercise one of three options: pay the debt or arrange to pay it, appoint a voluntary administrator to the company, or start winding up the company.
A lockdown DPN is issued to every Director of a company that’s failed to lodge PAYG and SGC returns within three months of their due dates. These Directors are automatically liable for all of the company’s tax debt incurred during relevant times of their directorships, and are prevented from escaping this liability should they then try to do so by appointing a Voluntary Administrator or Liquidator.
In this situation, a Director must either settle the debt forthwith, make an arrangement with the ATO to pay it, or be prepared to enter into personal bankruptcy.
Lockdown DPNs can come as a nasty shock because there’s no time limit on their issue. Directors who believe they’ve escaped personal liability by placing a company into Voluntary Administration or winding it up before arrival of one of these DPNs, could nonetheless get one at any time after these events, and be compelled to suffer the consequences.
Other lockdown DPN issues
Under s260-5 of the TAA, the ATO can issue garnishee notices to third parties indebted to Directors (for example bank, employer or trade debtors) requiring payment of a percentage of wages or other income – and may even seek to have assets in the form of lumps sums paid out.
Because no required lodgments have been made, and unpaid liability can’t therefore be determined precisely, the ATO will, pursuant to subdivision 268B of Schedule 1 of the TAA, estimate outstanding PAYG and/or SCG.
In this event the ATO will notify the company of how it arrived at its “reasonable estimate”, and when the money is due and payable. Default can lead to further issues including, but not limited to, wind up proceedings pursuant to s459 of the Corporations Act 2001 (Cth), and thereafter to actions against directors.
Nonetheless, pursuant to s269-35 of Schedule 1 of the TAA, defences to DPNs are available (see accompanying article Liabilities and defences under the director penalty regime).
But if you’re a Director and want to escape trauma that can arise from a DPN, you need to be absolutely sure that your defense is rock solid, based on expert advice.
Better still, you can avoid receiving a DPN in the first place by doing everything possible to ensure:
- BAS, PAYG, SGC and other business reports are lodged on time at the ATO, but where any are outstanding, that none has missed lodgment by more than three months beyond the due date.
- You’re constantly aware of your company’s PAYG and SGC obligations and how best to meet them.
- Company processes and protocols are up to date and adhered to in respect of these obligations.
- You continuously monitor your company’s finances, aided by expert advice.
- Your company’s registered address and details lodged with the Australian Securities Investment Commission (ASIC) are current.
We at Macks Advisory will advise and guide Directors who feel they could be issued with a DPN, or who have received one and are unsure how most effectively to deal with it.