Company Directors have a responsibility to ensure the company is paying its taxes on time.
The Australian Taxation Office (ATO) enforces this responsibility using Director Penalty Notices (DPNs). If you receive a DPN, it’s important to seek professional advice and respond quickly to avoid personal liability.
In this article, we learn about DPNs and the actions you should take if the ATO contacts you.
Director Penalty Notice (DPN) Meaning
A Director Penalty Notice (DPN) is a notice issued by the ATO that makes Directors personally liable for certain company tax debts.
Any tax debts that you are personally liable for are called “director penalties”. The ATO may send you a DPN for director penalties relating to:
- Superannuation Guarantee Charge (SGC)
- Pay As You Go (PAYG) withholding
- Goods and Services Tax (GST)
The notice includes information about the unpaid amounts and your options for dealing with the debt.
What to Do if You Receive a Director Penalty Notice
It’s important to act quickly if you receive a Director Penalty Notice. The action you take depends on the type of DPN you receive:
1. Non-Lockdown DPN
You’ll receive a Non-Lockdown DPN if the company has lodged its Business Activity Statements (BAS), Superannuation Guarantee Charge (SGC) statements and Instalment Activity Statements (IAS) within 3 months of their due date, but hasn’t paid its SGC, PAYG and GST.
You can avoid personal liability by taking one of the following actions within 21 days:
- Use the company to pay the debt in full
- Appoint a Liquidator and commence winding up the business
- Appoint a Voluntary Administrator
- Appoint a Small Business Restructuring Practitioner
Entering Small Business Restructuring (SBR) is an effective way to avoid director personal liabilities. If the company is unable to pay its debts in full, SBR may allow you to resolve the debt and continue trading.
2. Lockdown DPN
You’ll receive a Lockdown DPN if the company has not lodged its BAS, SGC and IAS within 3 months of the due date.
If the company is unable to pay its tax debts in full within 21 days, the lockdown DPN makes you automatically liable for the company’s tax debts. The ATO can take further action against you, regardless of any other actions the company takes.
Why Does the ATO Use DPNs?
DPNs were introduced in 2012 as part of an amendment to Australia’s tax law. The amendments were designed to reduce the risk of phoenix activities – which is where a company uses liquidation to avoid its debts, and then the company is reborn under a new name.
The use of DPNs also encourages better corporate governance in regards to tax debts that could negatively impact employees and the economy.
Who Can Be Issued With a DPN?
The ATO may issue a DPN to current Directors, past Directors and new Directors:
- Current Directors – Directors have a responsibility to ensure the company meets its PAYG, GST and SGC obligations. These obligations must be paid in full by the due date. You can be made personally liable for unpaid, overdue amounts.
- Past Directors – A Director remains personally liable for director penalties that were due before the date of your resignation. You are also liable for director penalties that are due after your resignation:
- For PAYG and GST – If the first withholding event occurred before your resignation.
- For SGC – From the date the charge became payable.
- New Directors – A new Director can be made personally liable for unpaid PAYG, GST and SGC, even if those debts were due before your appointment. You can avoid personal liability if – within 30 days of your appointment – you ensure the company pays its debts in full, or appoints a Liquidator, Administrator or Small Business Restructuring Practitioner.
How Does the ATO Recover Director Penalties?
DPNs are used to make Directors personally liable for certain company tax debts. The ATO can recover these tax debts by:
- Issuing garnishee notices – Garnishee notices allow the ATO to collect the outstanding amount directly from a third-party that owes you money. This includes employers, banks and customers.
- Applying tax credits toward the director penalties – The ATO has the power to apply your personal tax credits (e.g. from your income tax return) to the director penalty.
- Initiating legal recovery proceedings – The ATO has been known to utilise debt collectors, commence court proceedings, and/or make Directors bankrupt.
Company tax debts are often very large in scale. If you are made personally liable for these debts via DPN, you may need to consider bankruptcy and other formal insolvency appointments. Talk to an adviser to see whether bankruptcy is right for you.
What if a Company Has More Than One Director?
If a company has more than one Director, the ATO can issue DPNs to any/all of the Directors. This is called “parallel liability.” In most cases, all Directors are made liable for the same amount, but the amount may vary depending on the Director’s personal circumstances.
How to Avoid Getting a DPN
The best way to avoid getting a DPN is to work with an accountant to understand and fulfill your tax obligations. You should also:
- Stay on top of the company’s financial position.
- Make sure financial statements are lodged on time, even if the company is unable to pay its taxes in full.
- Keep your personal details up to date with the regulator and ATO to ensure DPNs are sent to the correct address.
- Talk to an adviser immediately if your company can’t pay its tax liabilities.
You only have 21 days to deal with a DPN, after which you become personally liable. Contact Business Savers immediately if you receive a DPN.
Manage Your Company’s Liabilities With Business Savers
Receiving a DPN is a serious matter. Once you receive the notice, you have 21 days to take action and avoid personal liability.
Business Savers is a team of experienced advisers and Registered Liquidators that can provide advice and support if you receive a DPN. We’ll work with you to assess your situation and determine the best course of action.
Contact us immediately if you receive a DPN or if you’re concerned about your company’s financial position.
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