Guide to Director Penalty Notices

What is a Director Penalty Notice?

Directors of a company are responsible for ensuring that the company complies with its tax and superannuation obligations, such as ‘pay as you go’ withholding tax (PAYGW), net Goods and Services Tax (GST) and Superannuation Guarantee Charge liabilities (SGC).

The ATO may choose to recover the unpaid amounts from either the company directly or from the directors personally by issuing a Director Penalty Notice (DPN).

Therefore, as a director, if your company fails to meet the above obligations and lodge its returns accordingly within the due date, you will be held personally liable for your company’s tax debts. If a company has more than one director, the ATO may in its discretion recover the company’s unpaid amounts from each of the directors equally.

When are you likely to receive a DPN?

DPN liability is triggered in two different scenarios:

1. Where your company has lodged its Business Activity Statements (BAS), Instalment Activity Statements (IAS) and/or SGC statements within 3 months of the lodgement due dates and have reported the unpaid amount of PAYGW, net GST and/or SGC; or
2. Where your company has lodged its BAS, IAS and/or SGC statements and reported the unpaid PAYGW, net GST and/or SGC amounts to the ATO after more than 3 months after the lodgement due date, or
3. Where your company has failed to lodge and report the unpaid PAYGW, net GST and/or SGC amounts for more than 3 months after the lodgement due date.

What should you do when you receive a DPN?

In case of the first scenario above, you will have a 21-day window to comply with the Notice by either:

1. paying the specified penalty amount in full,
2. negotiating a payment plan with the ATO to settle your company’s outstanding debts,
3. appointing an administrator or small business restructuring practitioner to the company as per the Corporations Act 2001 provisions, or
4. appointing a liquidator to wind up your company.

In the second and third scenarios above, you will be required to remit payment of the unpaid amounts in full in order to comply with the penalty notice.

New Directors and Resigning Directors are not Exempted

If you are a newly appointed director, you will still be liable for director penalties on your company’s unpaid tax amounts that were due before your appointment, unless you ensure that your company does the following within 30 days of your appointment:

1. pays its debts in full for PAYG withholding, net GST from 1 April 2020 and SGC from 1 April 2012;
2. appoints an administrator or small business restructuring practitioner under the Corporations Act 2001 provisions; or
3. your company commences winding up.

Kindly note that even if you resign as a director within 30 days of your appointment, you will not be absolved of your liabilities as a new director.

Similarly, resigning directors will continue to remain liable for directors penalties in relation to their company’s outstanding tax liabilities that were due and payable before their date of resignation. In case of liabilities that arise after the date of resignation, you, as a resigning director, will continue to remain liable, if the first withholding event (for PAYG withholding and GST) and/or the SGC for the reporting period occurs or becomes payable before the date of your resignation.

How is it enforced?

In the event that you fail to comply with the notice within 21-day period specified above, the ATO will commence recovery actions against you for the company’s unpaid tax debts. This may be done by either:

1. issuing a Garnishee Notice,
2. off-setting any of your personal tax credits against the director penalty amounts, or
3. by initiating legal debt recovery proceedings against you for the unpaid overdue amounts.

Defences

As a director, you will not be personally liable for a DPN if you can establish one of the following defences:

1. Illness: If the director not take part, and it would have been unreasonable to expect the director to take part, in the management of the company during the relevant period due to illness or another acceptable reason; or
2. All reasonable steps: If the director took all reasonable steps to ensure that the Company:

• paid all its outstanding amounts in full;
• appointed an administrator and/or a small business restructuring practitioner; or
• commence winding up proceedings.

1. Reasonably Arguable Position: This defence applies in the case of unpaid SGC liabilities, wherein the company treated the Superannuation Guarantee (Administration) Act 1992 as applying in a way that could be reasonably argued, was in accordance with the law, and took reasonable care in applying that Act.

The courts have held that a defence must cover the entire period that the director was under an obligation to ensure that their company’s liabilities were paid, including the period of the breach, due date, and expiry of the notice. Furthermore, a defence will not be valid if the director relied on others to meet their own obligations, such as other directors or professional advisors, or if they did not participate in the management of the company. Such conduct would constitute a breach of duty regardless of whether the director is aware of this or not.

If you or someone you know wish to discuss this issue further, then please do not hesitate to contact us on 02 8999 9809.