The post-COVID economic landscape is witnessing a significant shift in Australia as the Australian Taxation Office (ATO) has intensified its efforts to reclaim over $34 billion in debts from small businesses and self-employed individuals, a collection effort paused during the pandemic. At the forefront of this mission is the deployment of Director Penalty Notices (DPNs), which have emerged as a formidable, albeit blunt, mechanism. DPNs render directors personally liable for their companies’ unpaid liabilities related to pay as you go withholding tax (PAYG), goods and services tax (GST), and super guarantee charge (SGC).
With the ATO’s escalated use of DPNs, it is crucial to grasp their implications, the nature of liability they impose, the preventive measures available to directors, and the possible defenses one might leverage against them.
The Impact of DPNs on Corporate Financial Health
In the year leading up to May 2024, corporate insolvencies reached 10,774, representing a 36% increase from pre-pandemic figures and surpassing the highest levels experienced during the global financial crisis of 2012. During the pandemic and a brief subsequent period, the ATO abstained from issuing DPNs. However, this approach has radically changed, with more than 20,000 DPNs issued in the fiscal year ending 30 June 2023, and an increased issuance of over 26,000 in the following year, holding a debt value exceeding $4.4 billion.
Moreover, there’s been a notable rise in utilizing “lockdown” DPNs, which empower the ATO to pursue debts from directors years after a company’s liquidation, indicating a strategic shift from the previous 20% reliance on such notices to a current split of 70% lockdown versus 30% non-lockdown DPNs. This trend emphasizes the ATO’s commitment to recovering older debts through lockdown DPNs.
Understanding Director Penalty Notices
A Director Penalty Notice is the means by which the ATO enforces personal liability on directors for a company’s tax liabilities. There are two primary types of DPNs: non-lockdown and lockdown.
Non-lockdown DPNs are issued when a company has lodged its Business Activity Statement (BAS), Instalment Activity Statement (IAS), and SGC forms as required, yet fails to pay the respective PAYG, GST, or SGC debts timely. Lockdown DPNs, in contrast, are issued when a company neglects to submit these forms and fails to settle its estimated outstanding tax liabilities within the mandated timelines.
Receiving a DPN marks the ATO’s preliminary step toward action against directors, as they cannot initiate proceedings without first serving a DPN.
Navigating the Challenges of a DPN
Upon issuance of a standard DPN, directors are compelled to act within 21 days by either settling the company’s tax debt, personally paying it, appointing a voluntary administrator, a small business restructuring practitioner (SBRP), or instituting liquidation proceedings. Failure to act results in the “lockdown” of the DPN, consequently rendering directors personally liable and vulnerable to the ATO’s recovery measures.
For directors issued with a lockdown DPN, the only recourse is to settle the penalty in full, using either personal or company resources. Notably, the creation of this penalty is distinct yet parallel to the company’s original liability, meaning that settling either will discharge the other. However, if the company is liquidated without satisfying its debt obligations, the director remains accountable under a DPN.
Issues Around Director Resignation and New Appointments
Resigning from directorship does not absolve one from DPN-related liabilities. Similarly, assuming a new directorship implicates the new director for DPN liabilities after 30 days concerning any existing company debts preceding their appointment. Thus, newly appointed or prospective directors must promptly review and manage any outstanding company obligations to avert potential liabilities.
Available Defenses Against DPNs
Directors issued with a DPN can invoke defenses under certain conditions. These include:
- Illness or Other Just Reasons: If a director’s involvement in company management was unreasonable during the period the debt accrued due to illness or other valid reasons, they may argue against liability.
- All Reasonable Steps: The director must demonstrate efforts to ensure company compliance with tax obligations, appoint an administrator, or liquidate the company were made.
- Reasonably Arguable Position: Specifically applicable to SGC liabilities and GST disputes, this defense is based on reasoned interpretations of relevant legislation that could be as likely correct as incorrect.
The courts have expressed that defenses must cover the entire period of liability, and reliance on others, such as co-directors or advisors, does not constitute a valid defense.
Key Takeaways for Directors
To avoid receiving a DPN, it is imperative for directors to maintain their companies’ compliance with tax report and payment deadlines. In the event of receiving a DPN, directors should:
- Act Promptly: Immediate action is critical given the stringent response timeframe.
- Seek Expert Advice: Consultation with legal and financial professionals will provide clarity on options and obligations.
- Consider Actions Carefully: Evaluate strategies such as debt repayment, appointing administrators, or restructuring.
This strategic understanding and timely response to DPNs are crucial, especially given the ATO’s renewed emphasis on this method for debt reclamation.
Due to the severe potential ramifications of a Director Penalty Notice, we recommend you contact us immediately.
