The ATO is able to recover a company’s unpaid PAYG Tax and superannuation from the company’s directors by issuing any or all of the directors with a Director Penalty Notice.
There are two types of Director Penalty Notice which the ATO can issue to a company’s directors in the following circumstances.
21-Day DPN – PAYG Tax or Superannuation Unpaid but Returns Lodged Within Relevant Periods
A company is generally required to:
- Pay required amounts of PAYG Tax to the ATO by due dates.
- Lodge Business Activity Statements (“BAS”) with the ATO each quarter (or lodge monthly Instalment Activity Statements) reporting the amount of PAYG Tax payable to the ATO.
- Pay superannuation contributions for its employees by due dates.
- If the company fails to pay superannuation contributions by due dates, lodge a Superannuation Guarantee Charge Statement (“SGC Statement”) with the ATO.
If a company fails to pay PAYG Tax and superannuation, but it lodges its BAS within 3 months of due dates and SGC Statements when due, the ATO is able to issue a Director Penalty Notice to the company’s directors. The directors of the company can become liable to the ATO for the amount of PAYG Tax and/or superannuation claimed in the Director Penalty Notice. However, the directors can avoid personal liability under this type of notice if:
- The PAYG Tax or superannuation is paid; or
- The company is placed in liquidation or voluntary administration within 21 days of the date of the Director Penalty Notice.
“Lockdown” DPN – PAYG Tax or Superannuation Unpaid and Returns not Lodged Within Relevant Periods
If a company fails to pay PAYG Tax and superannuation and it also fails to lodge its BAS within 3 months of them being due or its SGC Statements by the SGC Statement due dates, the directors are automatically personally liable for unpaid PAYG Tax and superannuation. In these circumstances:
- The ATO can issue a Director Penalty Notice to recover unpaid PAYG Tax and Superannuation from the directors.
- Placing the company in liquidation or voluntary administration will not avoid the directors’ liability. In fact, the ATO can and will issue Director Penalty Notices after a company is already in liquidation or voluntary administration.
- The ATO can also estimate a company’s liability for PAYG Tax and superannuation and then issue a Director Penalty Notice based on these estimates of liability.
In May 2019 new legislation was passed to change the date upon which company directors become automatically liable for SGC amounts. The new date is the date which SGC Statements are due which are:
What Happens if You are Liable Under a Director Penalty Notice?
If you become liable under a Director Penalty Notice then the ATO will treat your liability just as it would treat any ordinary tax debt payable. The ATO can and commonly will:
- Commence legal proceedings against you and obtain a Judgment for the amount of the debt.
- Use the Judgment to issue a Bankruptcy Notice and then subsequently make you bankrupt.
- Garnishee funds from your bank account or from your wages.
If a company has multiple directors, the ATO will often target its recovery action at the director or directors which it considers have the best ability to pay. The ATO will have certain information on a director’s personal financial position based on the director’s past Income Tax Returns.
What Can You Do to Avoid Director Penalty Notice Liabilities?
The following tips will help directors avoid personal liability under Director Penalty Notices:
- If a company is facing financial difficulty, obtain professional advice at an early stage. A professional advisor will be able to advise on risks associated with the continued trading of the company including risks associated with Director Penalty Notices.
- Lodge BAS and SGC Statements on time or at worst within the timeframes set out above. If these lodgements are made but required amounts are not paid then directors will still have 21 days from the date of a Director Penalty Notice to place a company in liquidation or voluntary administration to avoid personal liability.
- Make sure directors’ postal addresses are up to date in records maintained by the ASIC. Director Penalty Notices are issued to directors’ personal addresses as recorded with ASIC. Non-receipt of a Director Penalty Notice due to a change of address is not a defence to a claim by the ATO.
- Note that if a liquidator or voluntary administrator are to be appointed to avoid liability, the time to make such an appointment is within 21 days of the DATE of the Director Penalty Notice, not 21 days from the date of receipt of the notice.
- If a Director Penalty Notice is received act promptly in obtaining advice from a qualified professional.
What Can You Do if You are Liable to Pay a Director Penalty Notice?
If you are liable under a Director Penalty Notice then:
- You should promptly obtain advice from a qualified professional.
- You can negotiate a personal payment arrangement with the ATO for the amount of the director penalty debt. We have assisted numerous company directors negotiate these types of payment arrangements.
- If there are other directors of the company, seek that they make a contribution to the ATO to pay a proportionate part of the liability.
- Consider whether it may be possible to put forward a proposal for a Personal Insolvency Agreement.
- If there are no other alternatives, consider filing for bankruptcy.
Old and New Directors
The ATO is able to issue a Director Penalty Notice to a director who was a director at the time when unpaid PAYG Tax or superannuation was incurred, but who has subsequently resigned.
The ATO is also able to issue a Director Penalty Notice to an incoming new director after the director has been in office for more than 30 days.
Defences to Claims by the ATO Under Director Penalty Notices
A company’s director will have a defence to a claim by the ATO under a Director Penalty Notice if they are able to establish that:
• Due to illness or another acceptable reason, the director was not managing the company at the time the liability which gave rise to the Director Penalty Notice was incurred.
• They took all reasonable steps to meet its obligations to pay PAYG Tax or superannuation.
• They took all reasonable steps, where relevant, to wind the company up or appoint a voluntary administrator to the company.
• They took reasonable steps to ensure that the company complied with its obligations to pay superannuation. This defence may be available, for example, in circumstances where directors reasonably thought they were engaging a subcontractor, however, the subcontractor was subsequently deemed to be an employee to which superannuation provisions applied.
Director Penalty Notices – Further Information and Advice
Given the serious effects the Director Penalty Notice regime may have on company directors’ personal financial positions, directors and their advisors should obtain appropriate advice and assistance when faced with the circumstances set out in this article.