Director Penalty Notices

What is a Director Penalty Notice?

The Taxation Administration Act 1953 (Cth) provides the Australian Taxation Office (ATO) with authority to issue a formal notice to directors when their company has not paid certain liabilities on time nor gone into voluntary administration, restructuring or liquidation. This is known as a director penalty notice (DPN).

The ATO holds directors responsible for ensuring the following company debts are reported and paid by the due dates:

• Pay as you go withholding (PAYGW) – tax withheld on certain payments such as employee wages;
• Goods and services tax (GST) – tax of 10% on most items sold in Australia payable via net assessments or instalments; and
• Super guarantee charges (SGC) – overdue amount of employee’s minimum superannuation guarantee plus interest and fees.

If a company does not pay the above on time, the ATO will seek to recover these amounts from directors by way of a DPN. This notice outlines the debts due and how a director may remit the penalty.

Further, if a company has not reported these liabilities in the first place, then the ATO has the power to estimate the unpaid and overdue amount. If this estimate of PAYGW, GST or SGC remains unpaid by the company then directors may be issued a DPN, liable for the company’s estimated debts.

All Directors May Be Subject to a DPN

Director penalties may be recovered equally from all directors, including those who have previously resigned.

Current Directors

An existing company director is legally responsible for ensuring the company’s PAYGW, GST and SGC are reported and paid by the due dates. If this is not undertaken dutifully while in control, the director may be issued with a DPN and held personally liable for these debts.

Former Directors

Director penalties that were due before a director resigns remain outstanding to them even after they leave the company.

Former directors are also responsible for amounts that fell due after their resignation if this date was after when the PAYGW and net GST should have been withheld or SGC liabilities were payable.

Remittance or Lockdown DPNs

If an unpaid company debt is reported within 3 months of the due date, a director can remit a DPN when they ensure the company does one of the following:

• Pays the debt in full;
• Appoints an administrator;
• Appoints a small business restructuring practitioner; or
• The company begins winding up.

Unfortunately, these remittance options are limited if liabilities are reported more than 3 months after their due dates which is when a lockdown DPN is issued by the ATO.

A lockdown DPN requires director penalties to be paid in full before remittance can be granted. If the associated company does not have the necessary funds, then a director may be personally liable and subject to ATO debt recovery.

What To Do When Served a DPN

When a current or former company director receives a DPN, the ATO normally allows 21 days for either the penalty amounts to be paid in full or a payment plan be negotiated.

Following this, the ATO’s alternative recovery methods may include:

• Issuing garnishee notices where an entity such as an employer or bank withholds a debtor’s money and pays it directly to the ATO;
• Offsetting any personal tax credits against the director penalties; and / or
• Initiating legal recovery proceedings to recoup the director penalty.

When You May Not be Liable

A director may avoid this debt recovery action if they are able to prove that they should not be liable for a director penalty. The ATO will consider this written defence when, during the relevant period, the director:

• Did not, nor be expected to, take part in the company’s management because of illness or other acceptable reason; or
• Took all reasonable steps to ensure the company paid the amount outstanding, an administrator or small business restructuring practitioner was appointed to the company or it began liquidation.

Mitigating the Risk of Receiving a DPN

The best scheme to mitigate the risk of receiving a DPN is for a company to pay its debts in a timely fashion.

A director may be able to avoid a lockdown DPN and personal liability for company debts if they ensure the company reports all PAYGW, GST and SGC within 3 months of the respective due dates. This will provide additional options if the company is unable to pay its debts in full including administration, restructure and liquidation.

Further DPN mitigation may be possible if all company addresses are kept up to date with the ATO and Australian Securities and Investment Commission (ASIC). This will ensure the company remains alert of any late lodgement notifications or debt recovery action before a DPN can be issued to company directors.

Avoidance for In-coming Directors

When becoming a director of a company, one should confirm there is a good record of reporting and paying debts as they may be considered accountable for historical amounts outstanding.

However, a new director can potentially avoid liability for these director penalties, if within 30 days of appointment, they have ensured the company:

• reports and pays all PAYGW, net GST and SGC;
• appoints an administrator;
• appoints a small business restructuring practitioner;
• or begins the process of winding up.

Even if a company director resigns within this 30-day period, they will still be liable for the company's unpaid PAYG withholding, net GST or SGC liabilities that were due before their appointment.

If you are currently a director of a company or considering taking on the position, it is important to understand the responsibilities involved and what it could mean for you and your personal assets. Please make sure you talk with us so we can provide further guidance and help mitigate your potential liability for company debts.

Our team at BLG Business Advisers are Wollongong Accountants who service right around Australia. There is no cost or commitment involved in an initial chat with us, which leaves you free to decide if we are the right fit for you.

Whatever you decide we wish you and your business every success!

*Please note that the above information is general advice only. We recommend you seek advice from a specialist relevant to your personal situation. This information is relevant at the time of publishing and is subject to change*