Any moratoria in place since COVID-19 is now at an end. The Australian Tax Office (ATO) has reverted back to recovering outstanding tax liabilities. If you are a director of a company, it is important that you are aware that the ATO can, in particular circumstances, recover unpaid company tax from you personally.
The main way in which the ATO can do this is through issuing a director penalty notice (DPN).
An overview of the DPN regime is set out below:
What is a DPN?
A DPN is a special notice the ATO can issue to directors under Part 4-15 of Schedule 1 of the Taxation Administration Act 1953 (Cth). It will be issued if a company owes outstanding amounts to the ATO due to a failure by the company to remit:
- GST it has collected on transactions it has entered into; or
- PAYG income tax it has withheld from its employees.
DPNs can also be issued to recover Superannuation Guarantee Charges which have been paid by the ATO due to a failure by the company to pay its employees their compulsory Superannuation.
A failure by a director to comply with a DPN will result in a director being deemed to be personally liable for defaulting company’s tax debts.
DPN Warnings
Prior to issuing a DPN, the ATO may send a DPN warning to a director. A DPN warning will state that there is an unpaid tax liability owing to the ATO and will warn the directors that the ATO may issue a DPN if the company does not pay the outstanding tax immediately or enter into a payment plan.
A failure to comply with a DPN warning will most likely result in a DPN being issued to the director.
Types of DPN
There are two types of DPNs that the ATO can issue depending upon whether a company’s tax lodgments are up to date:
- 21-day DPN
As the name suggests, upon receipt of a 21-day DPN directors have 21 days to do one of the following:
- have the company pay the tax owed;
- arrange a payment plan with the ATO to pay off the tax (for example, an arrangement to pay by instalment);
- cause the company to be placed into voluntary administration; or
- cause the company to be placed into liquidation.
Failure to take any of these steps will result in the director being deemed to be personally liable to pay the applicable tax debt.
A 21-day DPN is the most common type of DPN.
- Lockdown DPN
A failure to lodge business activity statements (BAS) will make it difficult for the ATO to properly assess a company’s tax liabilities.
To discourage this practice, the ATO has the power to issue lockdown DPN’s where a company has both failed to pay its tax debts and failed to lodge its BAS with the ATO within 3 months of the lodgment deadline.
Under a lockdown DPN, the only way for a director to avoid personal liability for the applicable tax is for them to arrange for the outstanding amount to be paid in full within the 21-day grace period.
The appointment of an administrator or liquidator will not impact upon their liability to pay an amount sought under a lockdown DPN.
Failure to comply
The ATO will commence proceedings against directors personally if they fail to comply with a DPN.
Even if you commenced your role as director after a tax payment deadline, you will still be subject to a DPN if, after 30 days of your appointment, you have not caused the company to comply with the DPN or resigned as a director.[1]
Defences
It is in a director’s best interest to act promptly if they are issued with a DPN warning or a DPN because the defences available to proceedings brought against you for a failure to comply with a DPN are very narrow and difficult to prove. They include:
- Illness
A director will not be liable to pay a DPN if, because of illness or for some other good reason, it would have been unreasonable to expect them to take part in the management of the company at any time when the company received a DPN.
- All reasonable steps
If a director can show that they have taken all reasonable steps to ensure that:
- the company complied with its obligation, but failed;
- an administrator of the company has been appointed;
- a small business restructuring practitioner for the company has been appointed;
- the company has been wound up; or
- there were no such steps available to the director.
In determining the ‘reasonable steps’, consideration will be given to the relevant time in office and all other surrounding circumstances.[2]
In our experience, a reasonable step or “some other good reason” defences are very difficult to establish.
Defences and key takeaways
If you are issued with a DPN or DPN warning it is essential that you act quickly. Failure to act quickly can lead to personal liability for company tax debts which may be irreversible even if the corporate taxpayer is wound up.
Vincent Young’s Commercial and Insolvency team is experienced in dealing with the ATO and DPNs. If you are concerned about being issued with a DPN, please contact David Greenberg, Commercial and Insolvency Partner, today.
[1] S 269-20(3) of Taxation Administration Act 1953.
[2] S 269-35 of Taxation Administration Act 1953.