The Australian Taxation Office (ATO) have been using Director Penalty Notices (DPNs) for several years with the objective of ensuring companies comply and pay their tax and superannuation debts.
The COVID-19 pandemic saw the ATO pause their debt collection, lodgement, and compliance activities. This reprieve was intended to reduce the impact of the pandemic on businesses and individuals. With JobKeeper coming to an end on 28 March 2021 and with the winding down of other Government stimulus measures, the ATO is refocussing on these activities.
Further, in addition to the direct cash and tax stimulus measures, the Government introduced a ‘safe harbour’ to allow distressed companies to trade insolvent. These measures are set to end on 31 March 2021.
Director Penalty Notices
Company directors are responsible for ensuring that a company’s debts are settled in a reasonable timeframe. The ATO has the power to issue company directors with DPNs for liabilities (reported to the ATO periodically) including:
- Goods and Services Tax (GST);
- Pay-As-You-Go Withholding (PAYGW); and
- Superannuation Guarantee Charge (SGC).
The DPN regime seeks to ensure companies pay their liabilities and the reduce occurrence of phoenixing activities (i.e. typically a scheme where a company’s assets are transferred to another and is then wound up for the purpose of avoiding its liabilities). The strengthening of the DPN regime has curtailed phoenix activity as it ensures directors are personally liable for relevant company debts.
A DPN must be issued before company debts can be recovered from directors. The DPN may result in garnishee notices, legal proceedings and offsetting the directors personal tax credits (e.g. income tax refunds).
Avoiding personal liability
The simplest way to avoid personal liability is to pay the debt upfront and on time, however sometimes this is not possible. Communication with the ATO allows companies to enter arrangements to pay their debts in a mutually agreeable timeframe (i.e. payment plans).
Where a DPN is issued, and the company has met its GST, PAYGW, and SGC reporting obligations within the relevant timeframes, directors have 21 days to have the notice cancelled by either paying the liability, appointing an administrator, or winding up the company.
Where a company does not meet its ATO reporting or lodgement obligations, and they report to the ATO more than three months after the lodgement due date, the ATO may estimate the unpaid amounts and issue a DPN. In this situation, personal liability cannot be avoided by appointing an administrator or liquidator. The only avenue for having the DPN cancelled in this situation is paying the debt.
Defences against DPN’s
If a director can establish one of the following statutory defences, they may not be liable for a DPN:
- the director did not take part in the management of the company (and it would be unreasonable for the director to have been expected to take part) during the relevant period due to illness or for other good reasons; or
- the director took reasonable steps (unless no reasonable steps could have been taken) to ensure that:
- the company paid the debt;
- an administrator was appointed;
- winding up proceedings commenced; or
- for SGC liabilities – the company treated the Superannuation Guarantee (Administration) Act 1992 as applying in a way that could be reasonably argued, was in accordance with the law, and took reasonable care in applying that Act.
For these defences to be relied upon, they must apply for the entire period the company had an obligation to pay the relevant liability.
Resigning and appointment as a director
If a director resigns from their position, personal liability may still arise via a DPN for a company’s unpaid liabilities that were due before their resignation. A former director may also be liable for amounts due after their resignation if they were incurred during a period of directorship.
New directors should review a company’s financial reports before accepting appointment as a director as a DPN may be issued for any liabilities incurred before their appointment.
The ATO have already signalled that they will be increasing their compliance and debt collection activities. The company insolvent trading safe harbour rules are also poised to end shortly which may result in company directors becoming liable for all debts if they continue to trade whilst insolvent. The ATO’s use of DPNs will likely increase in the times ahead.
Now is the time to seek professional help and advice if your business is struggling, to ensure that business records are accurate and tax payment obligation are understood. Using this time to plan and turn the business around is critical to ensure that the corporate liabilities are not forced upon directors.