Director penalty notices – in short DPN – are the ATO’s tax collection tool of last resort to get what they are owed – by going straight for a director’s personal assets.
Director Penalty Notices
Director penalty notices make a director personally liable for the company’s PAYG W, SG and GST debt. (SG stands for superannuation guarantee and is the 9.5% in super you owe on an employee’s wage.) Personally liable means your personal assets are on the line for the full debt.
In this episode, Damien Lehmann of Andreyev Lawyers in Sydney will tell you more. So if you are a director of a company, please listen. Not knowing about DPNs might cost you your house.
Here is what we learned but please listen in as Damien explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Lodge on Time
Whether you have the cash or not, make sure that you report your PAYG W, GST and SG debts on time. You achieve that by lodging your BAS and STP on time. Get an accountant to help you.
Lodging on time will mean a lot less trouble later on. Lodging on time but unable to pay is a lot better than not lodging and not paying.
Pay On Time
As a director, make sure your company pays its Pay-As-You-Go Withholding (PAYG W), GST and superannuation debts when due.
As a director you can be made personally liable with a DPN – often many years into the future – for any PAYG W, GST and SG incurred before and while you are a director. If you receive a DPN, contact your accountant or lawyer as soon as possible.
How to Challenge Director Penalty Notices
If you receive a DPN, act fast. You only have 21 days before the ATO can take you to court.
The DPN regime is tough – but receiving a DPN does not mean game over. There are four ways to fight it.
1 – Check the Address
The ATO must send the DPN to your residential address per ASIC register for your company. If they send the DPN to a different address, it may be invalid, requiring a re-issue and giving you more time to fight it.
Make sure you update your address on the ASIC register, because the ATO can validly send a DPN to an old address. It is your problem if you don’t get the DPN because you didn’t tell ASIC you moved.
2 – Check Time Limits
There are strict time limits within which a DPN can be used to recover amounts. These rules are complex, and the ATO sometimes gets them wrong.
The time limits are affected by the date your company began to be wound up (if applicable) as well as whether your company previously lodged super guarantee charge statements etc and whether the ATO issued default assessments to your company for the DPN amounts.
3 – Check Amounts
This one is really hard. The ATO often sends a short DPN letter asking for payment of alledged unpaid taxes or super, without giving any details how they got there.
The crux is that the ATO doesn’t have to. They don’t need to send a breakdown. They don’t need to show any supporting documents.
This can be really difficult for a director who joined long after. Documents covering the times long past might no longer be readily available.
Don’t assume that the ATO number is correct. It often isn’t. Ask the ATO for a detailed breakdown in a carefully worded Freedom of Information (FOI) request.
Asking the ATO for their calculations may not slow down their recovery process, but it is important to do. You should not agree to pay the ATO unless you believe their figures are correct. This is how a transparent tax system should operate.
4 – Claim a Defence
The law allows specific defences against DPN amounts. Here are three examples:
1 – Severe illness or ‘some other good reason’ that makes it unreasonable to expect you to have properly managed your company;
2 – You took all reasonable steps to try and make your company meet its obligations, or to wind up the company, and there was nothing you could reasonably have done to make this happen; or
3 – You interpreted the relevant law in a way that was ‘reasonably arguable’.
If any of these defences apply, then this may result in the DPN not imposing personal liability on you. It is critical that you present your defence to the ATO within the time limit – usually within 60 days of the DPN.
No Liability For Shareholders
A company gives its shareholders ‘limited liability’. So all a shareholder risks is the capital they agree to put in.
If a company goes under, the shareholders are under no obligation to contribute one cent extra more than the capital they pledged. It has always been like this. No change.
Personal Liability for Directors
What has changed is a director’s liability. That liability has continually extended over time.
Directors are – per Australian company law – to take due care putting the shareholder’s capital to work – referred to as a ‘director’s duties’. If the directors fail, then the company as well as the shareholders can bring a claim against the director.
Over time this personal liability has exponentially expanded to now also include a number of other third-party stakeholders.
Directors can be liable to employees for workplace injuries. They can be responsible for environmental damage the company’s production or products might cause. They can be responsible for certain third-party liabilities and debts, like PAYG W, GST and SG. And they can be liable for insolvent trading.
Insolvent trading
Insolvent trading means that the company continued trading while unable to meet its current liabilities.
Usually a director is not personally liable for the company’s debts. However, if these debts were incurred while trading insolvent, then the director is personally liable – putting current extensions aside that were put in place to allow companies to get through the COVID-19 crisis ‘alive’.
DPN Regime
The DPN regime is easy for bureaucrats to administer. One letter and then court.
At the beginning, directors could avoid personal liability by putting the company into administration within 21 days of receiving the DPN. So directors called ‘time out’ as soon as they got a DPN. And left the ATO and the company in shambles.
So they changed the rules and came up with a 3-month-rule. If a company failed to lodged within 3 months, the director became personally liable on the serving of the DPN. The result? You guessed it. Directors lodged within 3 months and avoided personal liability, even if the company never paid its debts to the ATO.
So they changed the rules again. Starting with the Superannuation Guarantee Charge (SGC) and then PAYG W, the directors can be made personally liable through the issue of a DPN without any protection. This has now extended to GST.
Pay the ATO First
So the moral of the story is – pay the ATO first – Pay your PAYG W, GST and SG. Other creditors might be louder and more demanding. But the DPN is a quiet but lethal weapon. Worse than any abusive creditor.
MORE
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.