Director Penalty Notices and SMEs
This is the fourth in a series of articles aimed at informing directors of their duties and options for small to medium enterprises (SME) if faced with insolvency. Following on from our previous article, we will now look at one of the more prominent risks of, firstly not reporting activity and superannuation guarantee when due, and secondly not paying debts owed to the Australian Taxation Office (ATO).
Directors need to keep a sharp eye out for Director Penalty Notices (DPN) from the ATO. These come in two forms, known as Lockdown and non-lockdown DPN’s, which we will discuss throughout this article.
The DPN regime is a targeted instrument used by the ATO to pierce the corporate veil and hold director’s personally liable for company tax debts (PAYG, SGC and from 1 April 2020 GST, LCT, WET). The key mistake made by directors, as previously mentioned, is non-compliance with lodgement obligations. That means if directors do not cause a company to lodge their returns on time, they are at risk of being issued a DPN.
Avoiding the liability is difficult and methods vary for each of the two categories of DPN’s received. The most obvious is to ensure lodgements are submitted on time or in any event within 3 months of the relevant due date (PAYG, GST, LCT, WET) or 1 month of the relevant due date (SGC) and paying the due amounts, or if this is not an option:
1) If lodgments have been filed on time a non-lockdown DPN will be issued, in which case, the personal liability can be avoided by
Paying the liability (either in full or in instalments),
Placing the company into administration or liquidation or
Appointing a Small Business Restructuring (SBR) practitioner (for where total company debts under $1 million)
The director of the company is given 21 days from when the notice is given to them i.e., when the letter is delivered to their registered address on ASIC, to implement the above actions to avoid personal liability. It should also be noted that newly appointed directors have 30 days to implement at least one of the above courses of action if they find themselves in a company with ATO liabilities.
2) If lodgments have been left unattended, directors face a far harsher notice in the form of a lockdown DPN in which they are given 21 days to take action. The available actions are limited to payment in full or payment in instalments, which leaves little choice for directors. The limit in options also extends to voluntary administration or liquidation, these two paths are not an available solution for those who receive this letter.
To enforce this claim against the directors personally, the ATO will still need to issue court proceedings for a liquidated claim in the amount of the outstanding debt. Contesting this is the path of most resistance, however it remains an option for those who believe they have a defence.
The ATO may recover director penalty liability equally from all the directors, depending on each director's circumstances.
Andrew Weatherley advises “even if a person resigns as a director of the company, you remain liable for director penalties for liabilities of the company that were due before the date of your resignation, but also those that fall due after the resignation in certain circumstances”.
The ATO can recover the amounts of the director penalty by:
issuing garnishee notices
offsetting any tax credits against the director penalties
initiating legal recovery proceedings against a director to recover the director penalty.
Mr. Weatherley also advises “In early 2022, the ATO issued approximately 50,000 DPN threat letters indicating if the relevant company does not engage with the ATO or pay its liability (even via a repayment plan), a DPN may be issued”. We expect a further batch of letters to be issued in late 2022.
Whilst not critical, the issuance of a DPN does put very tight timeframes on any course of action and can severely curtail options available. Seek appropriate help as early as possible.