Directors, as stewards of a company’s financial health, must be aware of the far-reaching implications of Director Penalty Notices (DPNs).

A Director Penalty Notice is a tool employed by the Australian Taxation Office (ATO) to hold company directors personally accountable for unpaid tax debts.

Company directors should be aware of the ATO’s intensified efforts to address company debts owed to the ATO. The ATO has significantly heightened the issuance of DPNs. In the year 2022 alone, nearly 18,500 DPNs were issued to individual directors, accompanied by 52,000 DPN warnings. Projections indicate a further increase in these figures for the years 2023 and 2024.

As at June 2023, there was a total of $50.2 billion in ATO’s collectable debts book.

The primary areas of concern are in relation to:

1. Unpaid GST;
2. Unpaid PAYG withholding tax; and
3. Unpaid superannuation debts.

Types of Directors Penalty Notices

These notices come in two types:

1. Traditional 21-day DPNs (Non-Lockdown DPNs); and
2. Lockdown DPNs.

The former provides a 21-day window for compliance, while the latter makes directors instantly liable. Navigating these distinctions is crucial for directors facing these notices.

Entering into repayment plans carries risks. Prioritizing payments, particularly related to Superannuation Guarantee Charge (SGC) and employee entitlements, is paramount to maintain safe harbor provisions under the Corporations Act.

Defences to Director Penalty Notices

Two primary defences against personal liability are presented:

1. Illness; and
2. Reasonable steps.

The illness defence requires directors to prove their incapacity to manage the company due to health issues.

The reasonable steps defence demands evidence of directors taking all necessary actions for compliance.

Consequences of Non-Compliance

Non-compliance with a DPN triggers severe consequences. Directors become personally liable for the tax debt, face legal action from the ATO, risk bankruptcy, and may receive garnishee notices. Swift action and seeking professional advice are emphasized due to the onerous nature of these liabilities.

ATO’s Recovery Methods

The ATO deploys three main methods for recovering director penalties:

1. offsetting tax credits;
2. issuing garnishee notices; and
3. initiating debt recovery legal proceedings.

Directors are urged to proactively seek legal assistance to navigate these challenges effectively.

Warning of Possible Director Penalty Notice

A pre-emptive measure, the Warning of Possible Director Penalty Notice, has been introduced. This cautionary letter from the ATO urges directors to address unpaid company debts promptly, offering options like paying the outstanding amount or entering into a payment plan.

Conclusion

Swift action is pivotal when faced with a DPN. Directors can (in certain circumstances) avoid personal liability by fulfilling DPN requirements and exploring available defences. Negotiations with the ATO are possible, but time is of the essence, as the 21-day countdown begins upon the DPN’s posting.

If you receive a DPN you should urgently seek legal advice as there are strict time limitations. Our team at Rose Litigation Lawyers are experienced in defending DPNs and can promptly provide advice in relation to actions brought against directors by the ATO.

If you have a question about a DPN, intend to defend a DPN you have received, or are worried about the potential consequences of non-compliance with company liabilities like PAYGW, GST and SGC, you can contact us for an obligation free consultation

The content of this publication is intended to provide a summary and commentary only. It is not intended to be comprehensive nor does it constitute legal advice, and has been prepared based on applicable legislation and case authority at the date of publication. You should seek legal advice on specific circumstances before taking any action.