What is a Director Penalty Notice?

 

A Director Penalty Notice (DPN) is one of the Australian Taxation Office’s most significant debt recovery tools. For company directors, it can also mark the point at which a company’s unpaid tax and superannuation obligations become an immediate personal concern.

Under Australia’s director penalty regime, directors can become personally liable for certain unpaid company liabilities, including Pay As You Go (PAYG) withholding, Goods and Services Tax (GST) and Superannuation Guarantee Charge (SGC).

A common misconception is that personal liability only arises when the Australian Taxation Office (ATO) issues a DPN. That is not the case. The underlying director penalty can arise when the company fails to pay a relevant liability by its due date. A DPN is the mechanism the ATO uses before commencing proceedings to recover that penalty from a director.

By the time a DPN arrives, decisions the company made about lodgement and payment months earlier may have already determined which options remain available to the director.

 

What Tax Debts Can a Director Penalty Notice Cover?

 

The director penalty regime can apply to unpaid:

• PAYG withholding;
• GST, including certain related indirect tax liabilities; and
• SGC.

These are company liabilities, but the director penalty regime can make a director personally liable for an equivalent amount where the company does not meet its obligations.

For directors, it is therefore not enough to assume that operating through a company will always prevent company tax debts from becoming a personal issue.

 

Does a Director Penalty Notice Make a Director Personally Liable?

 

Technically, the DPN itself does not create the underlying director penalty.

Under the Taxation Administration Act 1953 (Cth), directors have obligations to ensure that the company complies with certain taxation and superannuation obligations. Where the company fails to meet those obligations by the relevant due date, a director can become liable to a penalty equal to the company’s unpaid liability.

Before the ATO can commence proceedings to recover a director penalty, it must generally issue the director with a DPN and allow the statutory period to expire.

This is why waiting until a DPN arrives before addressing persistent tax debts can be dangerous. The director’s options may already have narrowed considerably.

 

Lockdown & Non-Lockdown Director Penalty Notices

 

The expressions “lockdown DPN” and “non-lockdown DPN” are commonly used to describe the consequences of whether the company’s relevant reporting obligations were lodged within the required statutory periods.

 

Non-Lockdown Director Penalty Notice

 

Broadly, where the relevant liabilities have been reported within the required timeframes but remain unpaid, a director may still have options for remitting the director penalty.

Depending on the circumstances and timing, these can include ensuring the company pays the relevant liability, appointing an administrator or small business restructuring practitioner, or beginning to wind up the company.

The availability of these options is one reason timely lodgement remains important even when a company does not have sufficient cash to pay the liability immediately.

 

Lockdown Director Penalty Notice

 

The position becomes considerably more difficult where relevant liabilities were not reported within the statutory timeframes.

In these circumstances, the director penalty can become “locked down”. Appointing an administrator or restructuring practitioner, or commencing a winding up, will not ordinarily remit a locked-down penalty.

Payment of the relevant director penalty is generally required to discharge the director’s personal liability, subject to any statutory defence or other issue that may apply in the particular circumstances.

An inability to pay should not become a failure to lodge.

 

How Long Do You Have to Respond to a Director Penalty Notice?

 

A DPN provides a director with 21 days from the date the notice is given before the ATO can commence proceedings to recover the director penalty.

The 21 days should not simply be calculated from the date the director happens to open or become aware of the notice.

DPNs can be sent to the address recorded for the director on the Australian Securities and Investments Commission (ASIC) register. Directors should therefore ensure their address details are kept current.

 

Does a Payment Plan Cancel a Director Penalty Notice?

 

No. Entering into a payment arrangement with the ATO does not, by itself, remit a director penalty.

A payment arrangement may be relevant to managing the company’s debt, but directors should obtain specific advice about what it means for an existing director penalty and their personal position.

 

Lodging on Time

 

Directors experiencing cash-flow problems sometimes focus entirely on whether the company can pay its tax bill. Under the DPN regime, when the company lodges its reporting obligations can be just as important as when it pays them.

A business may experience a period in which it cannot immediately pay all of its tax liabilities. Failing to lodge because the company cannot pay can make matters worse.

Late or missing lodgements can affect whether a director penalty becomes locked down and therefore whether insolvency or restructuring appointments remain capable of remitting the penalty.

Directors should ensure that the company’s BAS, activity statements and relevant superannuation reporting obligations are dealt with on time, even where the resulting liability cannot immediately be paid.

 

What Does a Director Penalty Notice Mean for a New Director?

 

Becoming a director of an existing company can expose the incoming director to liabilities that arose before their appointment.

Special rules apply to new directors. Broadly, a new director can become subject to director penalties for certain existing unpaid company liabilities if they remain a director after the applicable statutory period following their appointment.

The precise consequences depend on matters including the type of liability, when it arose, whether relevant statements were lodged and what action is taken following the director’s appointment.

A prospective director should conduct appropriate due diligence before accepting an appointment. Reviewing the company’s tax lodgement history, outstanding ATO liabilities and superannuation compliance can be particularly important.

Discovering significant tax problems after accepting the directorship may leave considerably less time to respond.

 

Can Former Directors Receive a Director Penalty Notice?

 

Resigning as a director does not necessarily eliminate liability for director penalties relating to periods when the person was a director.

A former director may still receive a DPN concerning liabilities for which they became subject to a director penalty while holding office.

Similarly, resignation should not be treated as a strategy for dealing with an existing DPN. Where a director is concerned about the company’s ability to meet its tax and superannuation obligations, advice should be obtained about both the company’s position and the director’s potential personal exposure.

 

Defences to a Director Penalty Notice

 

Whether a defence is available is dependent on the circumstances and supporting evidence. Potential defences can concern matters such as a director’s participation in the management of the company because of illness or another acceptable reason, or whether the director took reasonable steps to ensure the company complied with its obligations or took specified insolvency-related action.

Specific provisions also apply in relation to SGC liabilities.

These are not broad discretionary excuses for failing to deal with company tax obligations. A director considering relying on a defence should obtain legal advice about the statutory requirements and the evidence needed to establish it.

 

Receiving a Director Penalty Notice

 

A DPN should be treated as urgent. The first step is to identify precisely what liabilities are included in the notice and whether they are lockdown or non-lockdown liabilities. The company’s lodgement history should be reviewed, together with the relevant due dates and the accuracy of the amounts claimed.

Directors should then obtain appropriate legal and accounting advice about the options that remain available. Depending on the facts, this may require input from taxation lawyers, accountants and restructuring or insolvency practitioners.

It is also important not to assume that disputing the company’s underlying tax position, negotiating with the ATO or entering a payment arrangement automatically stops the DPN process.

 

The ATO’s approach to Director Penalty Notices

 

DPNs should not be viewed as an exceptional measure reserved only for companies on the verge of liquidation. They form part of the ATO’s broader debt collection and compliance framework.

Improvements in reporting and data available to the ATO have also increased its visibility over employer obligations. This makes timely reporting and active management of tax debts increasingly important for directors.

 

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