What to do if you receive an ATO Director Penalty Notice

Did you know that company directors may potentially become personally liable for unremitted Pay As You Go (PAYG) deductions, Superannuation Guarantee Charges (SGCs) or Goods and Services Taxes (GST) – and WET and LCT?

The Australian Taxation Office (ATO) has significant powers to recover a company’s unpaid liabilities personally through its directors and may issue a Director Penalty Notice (DPN).

This article focuses on the DPN regime and the options directors have in the event that they receive a DPN.

Why does the ATO have these powers?

The DPN regime was introduced to prevent companies and their directors from avoiding their PAYG, SGC and GST liabilities. The laws administering the DPN regime have over the past been strengthened to reduce the occurrence of phoenix activities which were prevalent under previous laws.

A phoenix activity occurs when a company is deliberately wound up for the purposes of its director/s avoiding personal liability, after having been issued with a DPN.

The ATO’s recovery options are now broader and linked to the company’s reporting obligations.

Directors in receipt of a DPN face personal liability and should act immediately.

The DPN regime

A company is required to report its PAYG, SGC and GST liabilities periodically, with the frequency depending on the size of the company.

The ATO must issue a DPN before it can use any recovery options against a director. These include issuing garnishee orders to third parties, offsetting of personal tax credits against the director penalty and initiating legal proceedings for recovery of the debt.

Options available to avoid personal liability

The options available to directors for avoiding personal liability of a company’s unpaid PAYG, SGC or GST liability will depend on the circumstances under which the DPN issues.

  1. PAYG Withholding Amounts

If the unpaid amount of PAYG is reported within three months of their due date, a director has 21 days from the date of the DPN to have the director penalty remitted (cancelled) by:

  • paying the liability;
  • appointing an administrator under s 436A, 436B or 436C of the Corporations Act 2001;
  • causing the company to be wound up.

If the unpaid amount of PAYG is reported more than three months after their due date (PAYG Reporting Date), or are unreported, then the only option available for remitting the penalty is by paying the liability.

  1. SGC Amounts

As of 1 March 2019, new legislation was passed to amend the date from which directors become liable for SGC amounts. If the unpaid amount of SGC is reported by the due date for the SGC statement (SGC Statement Date), a director has 21 days from the date of the DPN to have the director penalty remitted (cancelled) by:

  • paying the liability;
  • appointing an administrator under s 436A, 436B or 436C of the Corporations Act 2001;
  • causing the company to be wound up.

The SGC Statement Dates are:

Quarter Period Due Date
1 1 July – 30 September 28 November
2 1 October – 31 December 28 February
3 1 January – 31 March 28 May
4 1 April – 30 June 28 August

 

If the unpaid amount of SGC is reported after the SGC Statement Date, or are unreported, then the only option available for remitting the penalty is by paying the liability.

  1. GST Amounts

The new legislation also introduces GST (and WET and LCT) to the DPN regime. If an unpaid amount of GST (or WET or LCT) is reported within 3 months of their due date, a director has 21 days from the date of the DPN to have the director penalty remitted (cancelled) by:

  • paying the liability;
  • appointing an administrator under s 436A, 436B or 436C of the Corporations Act 2001;
  • causing the company to be wound up.

If the unpaid amount of GST is reported more than three months after their due date (BAS Lodgement Date), or BAS is not lodged, then the only option available for remitting the penalty is by paying the liability.

The new legislation also allows for the ATO to estimate the aggregate of GST amounts owed by the company, and issue a DPN based on that estimate.

  1. Personal Liability

Failure to report a PAYG, SGC or GST obligation may result in the ATO making an estimate of the unpaid and overdue amount to which the DPN regime will apply.

Where the PAYG Reporting Date, SGC Statement Date or BAS Lodgement Date are not observed, a director cannot avoid personal liability for those amounts by placing the company into administration or liquidation. The only option available where the ATO has commenced proceedings to recover a company’s liability that is unpaid and unreported after three months, is for a director to cause the company to pay the debt or to pay it personally.

A company may enter into an arrangement with the ATO to pay the debt in which case the ATO will not commence personal recovery action against a director. However, the ATO may use a director’s personal tax credits to offset the company debt.

Directors in receipt of a DPN should seek urgent advice on their available options to avoid personal liability or to lodge a defence.

What are the defences against director penalties?

Directors may not be liable for a director penalty if they can establish one of the available statutory defences. These include:

  • that the director did not take part in the management of the company (and it would have been unreasonable for the director to have been expected to take part) during the relevant period due to illness or for other good reason;
  • that the director took reasonable steps (unless no reasonable steps could have been taken) to ensure that:
  • the company paid the debt;
  • an administrator was appointed to the company;
  • winding up proceedings (within the meaning of the Corporations Act 2001) were commenced.

Further, a director may not be responsible for a penalty with respect to an SGC liability if it can be shown that the company took reasonable care in applying the provisions of the Superannuation Guarantee (Administration) Act 1992 in a way that could be reasonably argued as consistent with that Act. This recognises that there can be some uncertainty about SGC liabilities, especially relating to employee entitlements. Note though that there is no corresponding defence for PAYG withholding obligations.

The ATO uses the company address listed on ASIC public records and directors are responsible to keep this information current. Consequently, claiming that the DPN was sent to the wrong address will not be an effective defence.

Incoming and outgoing directors

If you resign from your position as a director, you may still be liable for a DPN equal to any unpaid PAYG, SGC or GST due prior to your resignation. You may also be liable for amounts falling due after you resign, if the first PAYG withholding event in the reporting period occurred before you resigned or for SGC liabilities accrued in the quarter ending before resignation.

Incoming directors should carefully check the company’s financial records for any unpaid PAYG, SGC or GST liabilities to ensure they will not attract a DPN upon their entry to the company.

Summary

The laws governing the DPN regime have been strengthened in the past to provide the ATO with greater powers for the recovery of company PAYG and SGC obligations. It is now easier for directors to be held personally liable for these debts.

Directors should ensure their financial management systems allow for PAYG , SGC and GST contingencies and their company reporting requirements are regularly reviewed and maintained. This may require the assistance of a professional to ensure that personal liability, penalties and interest, wherever possible, are avoided.

If you or someone you know wants more information or needs help or advice, please contact us on 1800 640 509 or email mail@sajenlegal.com.au.

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