Director Penalty Notice

7

What is a Director Penalty Notice?

A Director Penalty Notice (DPN) is a notice that the ATO sends a director that make a director personally liable for the following type of tax debts of a company – PAYGW, Superannuation Guarantee Charge (SGC), GST, Wine Equalisation Tax (WET), and luxury car tax (LCT) (hereafter referred to as DPN liabilities).

The ATO has hardened its stance with DPNs now no longer its last resort against non-compliant companies and their directors. The ATO has changed tack to go straight after directors rather than issuing warning letters and statutory demands first which had been the practice in the past.

It is critical companies pay attention to liabilities around the aforementioned taxes, and keep up to date with lodgements to avoid any chance of a DPN being issued.

For DPN purposes, directors include:

  • A person validly appointed as a director.
  • These individuals are relatively easy to identify as their names will appear on ASIC’s Company Register and on company documents.
  • A person, even though not validly appointed as a director, that acts in the position of a director (a ‘de facto’ director). These are individuals whose activities mirror those of a company director, although they do not hold the official title. They are directors in substance, if not in form.
  • A person, even though not validly appointed as a director, whose instructions or wishes the directors are accustomed to act in accordance with. This group are commonly referred to as shadow directors. They may act through nominees or other appointed directors (e.g. a bankrupt husband controlling a company through his wife who has been appointed a director).

While under the law any of the above individuals are directors for the purposes of the DPN regime, typically the ATO will initially send DPNs to those named as directors on ASIC’s Company Register.

The ATO can issue a DPN to a director who was a director at the time when unpaid DPN liabilities arose, but who has subsequently resigned.

The ATO can also issue a DPN to an incoming new director. Whilst the director is liable immediately, the ATO cannot issue a notice until the director has been in office for more than 30 days.

If an individual is offered a directorship, they should do some due diligence. Check if the company has any unpaid or unreported DPN tax liabilities. Once you are appointed as a company director you can become personally liable for any unpaid amounts.

Why is a DPN issued?

The ATO have basically stated that any director who is simply not working to try to resolve their company’s DPN liabilities, and/or who are not working with the ATO to resolve those liabilities – may be given a DPN.

The ATO has stated that under its stronger action policy, that it is targeting companies for that for stronger action such as issuing DPNs where they:

  • “Are unwilling to work with the ATO
  • Repeatedly default on agreed payment plans
  • Don’t have the capacity to pay and don’t take steps to resolve their situation
  • Have been subject to an audit where we detect deliberate avoidance and payment avoidance continues
  • Appear to be engaging in phoenix activities (using liquidation to avoid financial obligations without risking assets and with the intention of resuming business operations through a new entity)”.

Ultimately, there are no hard and fast rules around when a DPN will be issued by the ATO. The discretion lies with the ATO having regard to the above points.

A DPN must be given 

To be valid, the DPN must be given to the director in question. Division 269-50 of Schedule 1 of the Tax Administration Act (1953) makes it clear when a DPN is deemed to be ‘given’:

The Commissioner may give you a notice under section 269-25 by leaving it at, or posting it to, an address that appears, from information held by ASIC, to be, or to have been within the last 7 days, your place of residence or business.

Thus, it is vital that directors keep their company records up-to-date with ASIC because a director will be deemed to have been given the notice even if it sent to an old address. Failure to have actually received a DPN is not a defence, provided it was ‘given’ in accordance with the aforementioned Division 269-50.

There is some case law in this area which clarifies the aforementioned 269-50. In Deputy Commissioner of Taxation v Lawson:

The Defendant’s mere assertions as to not having received the Second DPN are not sufficient to displace the deeming effect of s 269-50). In any event, an assertion of non-receipt is not sufficient to establish the non-delivery of a DPN.

Therefore, the only way to prove that a DPN was not ‘given’ to a director is to prove that the Commissioner did not leave it or post it to the address/addresses held by ASIC. If they did, then a director must show that the Commissioner did not do so to the address that ASIC had on file and did not use a valid business or residential address from the past seven days.

Types of DPNs

There are two types of DPNs that the Commissioner can issue – a “21 Day DPN” which has been around for many years, and a “Lockdown DPN”, which came into being in 2012.

21-DAY DPN

A 21-day DPN or traditional DPN is a notice requiring the company to do what is required within 21-days, or the director(s) may face personal liability for the debts of their company.

A traditional or 21-day director penalty notice is given by the ATO when a company’s tax liabilities are not paid but have been reported to the ATO within three months of the due date.

This type of DPN gives the director of the company 21 days to do any of the following:

  • the company complies with its obligations (pays it debts); or
  • an administrator of the company is appointed under section 436A, 436B or 436C of the Corporations Act 2001; or
  • a small business restructuring practitioner for the company is appointed under section 453B of that Act; or
  • the company begins to be wound up (within the meaning of Corporations Act).

This basically means, (1) pay (or enter into an agreement to pay); (2) put the company into administration or liquidation; or (3) engage a small business restructuring practitioner.

If none of these three things are done within the required time, then the director becomes personally liable for the amount of tax the ATO says is outstanding.

Example – 21 DAY DPN
Bob is the director of Widgets123 Pty Ltd. Widgets123 withholds tax (PAYGW) from employee wages and should pay those amounts to the ATO quarterly. In the first quarter of the financial year, Widgets123 lodged its BAS returns on time but didn’t pay the PAYGW amounts to the ATO.

The ATO can issue a DPN to Bob which would tell him that he will become personally liable for that PAYGW debt of Widgets123 in 21 days. If, during those 21 days, Bob makes the Company pay the debt or if he puts Widgets123 into liquidation, voluntary administration, or small business restructuring, then Bob is NOT personally liable for the Widgets123 tax debt.

If he does nothing in the 21 days, Bob is personally liable for that Widgets123 PAWGW tax debt.

To be clear, the 21-day clock commences from the date of the DPN Notice, likely being the date on which the ATO posts it or leaves it – this is as distinct from when the director receives the notice.

LOCKDOWN DPN

A lockdown director penalty notice is given when a company’s tax liabilities are not paid and have not been reported to the ATO within three months of the due date.

Example
Sandra is the director of Marbles123 Pty Ltd. Marbles123 withholds tax (PAYGW) from employee wages and should pay those amounts to the ATO quarterly. In the second quarter of the financial year, Marbles123 didn’t lodge its BAS returns within three months of the date required for lodgement and didn’t pay the amounts to the ATO. Many months later, Marbles123 lodged the BAS but still didn’t pay the tax due.

The ATO can issue a DPN to Sandra which would tell her that she is personally liable for that BAS debt of Marbles123. There is nothing Sandra can do to avoid personal liability. In the future, the ATO can pursue either Marbles123 or Sandra personally, or both, for the amounts due by Marbles123.

Corrective action – 21-day DPN

As flagged, after this type DPN has been issued, there are various options (correction action) for a director to avoid personal liability within the 21-days as follows:

Pay The Amount Owing

Initially, the director (or directors) of the company can pay the amount of the tax debt.

If the company has borrowing capacity, or can quickly sell some assets, or borrow against those assets, then the company can simply pay its debts.

Obviously, this could be a substantial sum of money, so the company may not be able to find the funds to pay the tax debts.

The director / company may also be required to provide security to secure this tax debt.

Alternatively, if the funds are not on hand, a payment plan with the ATO should be strongly considered to resolve the DPN.

Appoint A Liquidator To Wind Up The Company In Insolvency

If the company and/or the directors are unable to pay their tax debts, then the directors can resolve to wind the company up.

If the company appoints a liquidator, then there may be serious consequences for the company and the directors, and so it is vital that you seek urgent advice in relation to the risks and liabilities.

If done within the 21-days of a traditional DPN, then this will stop any personal liability to arise from that DPN.

The company can also resolve to appoint an administrator.

A Small Business Restructuring Practitioner For The Company Is Appointed

Before appointing a restructuring practitioner, directors should consider whether, at the time a restructuring plan is to be proposed to creditors, the company will have (or substantially complied with the requirement to have):

  • paid the entitlements of employees that are due and payable
  • given returns, notices, statements, applications or other documents as required by taxation laws (within the meaning of the Income Tax Assessment Act 1997).

Unless the two criteria above have been satisfied, the company cannot propose a restructuring plan.

Appoint An Administrator To The Company

A company can avoid liquidation, and a director can avoid personal liability under a DPN, by resolving that the company enter voluntary administration.

Section 436A of the Corporations Act 2001 (Cth) allows the company to appoint an administrator if the board has resolved to the effect that:

  • in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and
  • an administrator of the company should be appointed.

There are several reasons why an administration may be preferable to a liquidation.

The main reason is that the administrator will attempt to negotiate with the company’s creditors (including the ATO) to compromise the debts and seek consent to enter a deed of company arrangement (“DOCA”).

Corrective action – lockdown DPN 

In contrast to the 21-day DPN, a director’s options (corrective action) are very limited in the event they are given a lockdown DPN.

Paying the company debt in full within the 21-day period is the only way a director can avoid personal liability for a lockdown DPN.

The reason for this is to ensure that directors cannot avoid liability for aged taxation debts by placing the company into administration and then liquidation.

To recap, a lockdown DPN is given when a company’s tax liabilities are not paid and have not been reported to the ATO within three months of the due date. Thus, to avoid this type of DPN which severely limits your options going forward, at least have your ATO lodgments (Activity Statements and SGC statements) up to date.

DPN Defences

The main two defences for personal liability from a DPN are as follows:

Illness Or Some Other Good Reason

A defence can be that due to illness or another acceptable reason, a director was not managing the company at the time the liability was incurred. This defence can be used if it is “unreasonable to expect (the director) to take part due to illness (theirs or someone else’s) or some other good reason”.

Specifically, under division 269-35(1) of Schedule 1 of the Tax Administration Act says:

You are not liable to a penalty under this Division if, because of illness or for some other good reason, it would have been unreasonable to expect you to take part, and you did not take part, in the management of the company at any time when:

you were a director of the company; and for illness to be a valid defence, the illness must have led to the director not taking part in the management of the company at all relevant times.

In Snell v Deputy Commissioner of Taxation [2020] NSWCA 29, the Court said at paragraph 49:

As a whole, the provision contemplates the circumstance that the director does not, and could not reasonably have been expected to, participate in management, because of illness or some other good reason. Essentially, this envisages a situation in which, though nominally remaining in office as a director, the relevant director does not participate in management because of illness or another good reason.

In short, it involves justifiable non-participation in management, against the backdrop that it is the obligation of a director to participate in management of the company, and a director is not entitled to choose not to participate. It is unsurprising that, against that backdrop, the defence is not easily established. The defence means that a director who justifiably does not participate in management is not responsible for the Company’s default …

Thus if, despite even serious illness, the director continues to participate in management, the defence is not available.

As you can see, the bar for what constitutes an objectively reasonable illness, or good reason is set very high.

The illness or good reason must be for the entire relevant time.

The relevant time is from the first offending day (e.g. when the superannuation was not paid) to the end of the 21-day period specified in the notice. Not just part of this time.

Reasonable Steps

Under division 269-35(2) of the Tax Administration Act, to establish this defence, requires a director to show that they have they have done the following:

  • Tried to pay the tax debt.
  • Tried to put the company into administration.
  • Tried to a small business restructuring practitioner.
  • Tried to appoint a liquidator
  • There were no steps which could have been taken.

According to case law, all of the above action must have been explored – not just one or two of the avenues:

If reasonable steps taken in pursuit of one option fail, non-compliance and the obligation of the director or former director will continue. The director or former director will therefore have to take reasonable steps to achieve compliance in another way.

If non-compliance continues long enough before a notice is served each of the four options will eventually have to be addressed and the defences will have to cover all options.

Observations

As can be seen, establishing either defence is difficult. Any illness or other good reason must be for the entire duration of the offending period. Alternatively taking reasonable steps involves canvassing all four of the earlier-mentioned courses of action.

A DPN defence needs to be submitted to the Commissioner in writing, clearly articulating what defence you are seeking to rely on. It should provide all the necessary information and supporting documentation to substantiate the defence.

DPN remittance

Remittance of a DPN is possible, in accordance with the following rules:

PAYGW and NET GST

If the unpaid amount of PAYGW or net GST is reported within three months of the due date (or, in the case of new directors, within 3 months of the date of their appointment), the penalty can be remitted by ensuing the company does one of the following:

  • paying the debt in full
  • appointing an administrator under section 436A, 436B or 436C of the Corporations Act 2001
  • appointing a small business restructuring practitioner under section 453B of that Act
  • the company begins to be wound up (within the meaning of the Corporations Act 2001).

If the unpaid amount of PAYGW or net GST:

  • is reported more than 3 months after the due date (or, in the case of new directors, 3 months or more after the date of their appointment), the only way to remit the director penalty is to pay the debt in full
  • remains unreported after 3 months, the corresponding director penalty can only be remitted by payment in full.

Example
Kerry and Claire are directors of ABC Pty Ltd, which is required to pay PAYGW on a quarterly basis. For the January to March quarter in the 2019–20 income year, the company withheld $4,000 from payments made to its employees and directors.

They also failed to report or pay $2,000 in GST collected.

The company did not report or pay the above amounts within 3 months of the due date of liability.

Kerry and Claire each receive DPNs.

The only way Kerry and Claire’s director penalties can now be remitted is by Kerry or Clare making sure that the amounts are paid in full within 21 days of the date the notices are given to them.

Kerry and Claire place the company into administration. However, Kerry and Claire’s director penalty amounts are still payable by either one or both to the equivalent amount of $6,000 ($4,000 + $2,000).

SGC Amounts

For SGC, remission of the director penalty depends on when the ATO have been notified about SGC amounts.

If the unpaid amount of the SGC is reported by the due date for the SGC statement, the penalty can be remitted by ensuing the company does one of the following:

  • paying the debt
  • appointing an administrator under section 436A, 436B or 436C of the Corporations Act 2001
  • appointing a small business restructuring practitioner under section 453B of that Act
  • beginning to wind the company up (within the meaning of the Corporations Act 2001).

The only way to remit the amount is to pay the debt in full if:

  • the unpaid amount of the SGC obligation is reported after the due date
  • any part of the liability remains unreported.

Example
Kerry and Claire are directors of ABC Pty Ltd, which has incurred a SGC liability as it failed to remit employees’ superannuation to a complying superannuation fund by the due date. It also failed to report the unpaid amounts to the ATO by the due date for the SGC statement.

Kerry and Claire each receive DPNs.

The only way Kerry and Claire’s director penalties can now be remitted is by causing the amounts to be paid in full within 21 days of the date the notices were given to them. This is because the company did not report or pay the SGC amounts by the due date for the SGC statement.

DPN Indemnity

If a director is liable to pay and has indeed paid an amount under the DPN provisions, the Tax Administration Act provides a right of indemnity which allows the director who paid the DPN to then recover the amounts paid against their company and any other director that was equally liable. This can come in handy where there is a dispute between the directors over who was responsible for the original non-payment and only some of the directors end up paying the amount owing under the DPN and wish to recover those amounts from either the company or other non-paying directors.

The issue of indemnity and recoupment is relevant because if a company has multiple directors, the ATO will typically target recovery action at the director or directors which it considers have the best ability to pay. This can be gleaned by the ATO from past individual tax returns.

I’ve received a DPN – what should I do?

If you have been issued with a DPN, you should seek advice from your lawyer and provide copies of the following:

  • A copy of the director penalty notice.
  • All documents and/or receipts in relation to the alleged unpaid tax obligations.
  • All relevant company information and financial information.
  • All information in relation to the defences available (illness and/or reasonable steps.
  • All other relevant information requested by your lawyer.

If you don’t take corrective action, do not successfully make out a defence, and do not get the DPN amount remitted…you will become personally liable for the DPN amount. The ATO will then treat the debt as it would treat any ordinary tax debt.

Thus, the ATO may:

  • Commence legal proceedings against you to obtain a judgment for the amount of the debt.
  • Use the Judgment to issue a Bankruptcy Notice and then subsequently make you bankrupt.
  • Garnishee funds from your personal bank account or from your wages.

This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.