Managing personal liability with Director Penalty Notices

Generally speaking, Director Penalty Notices (DPNs) are a tool for the ATO to encourage directors of distressed entities to either enter into an arrangement to pay the specified debt, or appoint an external administrator to the company. As such, the ATO’s use of the DPN tool appears motivated by both financial (accelerating debt collection) and public policy (discouraging insolvent trading of distressed companies) interests.

DPNs make directors personally liable for certain tax debts of a company, namely:

1. PAYG withholding;
2. GST;
3. Mandatory superannuation contributions;
4. Luxury Car Tax; and
5. Wine Equalisation Tax.

Personal liability puts assets owned by the director(s) at risk and in some cases can result in the bankruptcy of the director.

Why would you receive a Director Penalty Notice?

The most likely reasons are:

• Historical non-reporting;
• Significant ATO debt which remains unpaid; or
• Suspicion of phoenix activity.

Lock-down vs Non-Lockdown DPN?

Non-lockdown DPNs are issued to directors of companies that have reported their tax debts to the ATO within the following timeframes, but the debts remain unpaid:

• Business Activity Statements (BAS) and instalment activity statements (IAS) within three months of the liability’s due date; and
• Superannuation Guarantee Statements by the due date.

When a Non-Lockdown DPN is issued, the penalty can only be ‘remitted’ (avoiding personal liability of the directors) if within 21 days after the DPN is given, the company either:

• Complies with its obligations (pays the debt); or
• Appoints a Small Business Restructuring Practitioner, Administrator or Liquidator

On the other hand, Lockdown DPNs are issued where relevant tax debts not only remain unpaid, but also unreported, for the same periods as for Non-Lockdown DPNs. With Lockdown DPNs there is no ability to remit (i.e. cancel) the penalty, other than by paying the debt in full. Appointing a liquidator, administrator or small business restructuring practitioner will not extinguish this personal liability.

What if you were not a director at the relevant time?

If you are a newly appointed director to a company, from 30 days following your appointment, you may become personally liable under the DPN for historical liabilities pre-dating your appointment if the company has not either:

• Complied with its obligations; or
• Appointed a Small Business Restructuring Practitioner, Administrator or Liquidator.

Even if you have resigned as a director, you can still be issued a DPN in respect of relevant tax liabilities that arose before your resignation.

How to deal with a DPN

If you have received a Director Penalty Notice, urgently act to:

1. Review the schedule to the Director Penalty Notice to understand the amount of the DPN debt for which you are already personally liable (“lockdown” – usually Column 5) versus the amount for which you will only become personally liable should you fail to act within 21 days.
2. Review the company’s tax reporting history to check that the information contained in the DPN notice is incorrect and disputable.
3. Consider what cash resources (current and projected cash) is available to discharge the specified debt.
4. Ensure any funds remitted to the ATO include explicit instructions allocating same first and foremost to any lockdown component of the debt.
5. Consider options to raise a defence to the DPN such as:
   
   • Illness or other reason preventing you managing the company; or
   • Demonstrated attempts to cause the company to either pay the tax debt or appoint and external administrator.

Where a company’s financial position is such that it is unable to either discharge the debt referenced in the DPN or maintain a structured repayment plan acceptable to the ATO, directors should urgently engage with an insolvency professional to avoid the risk of becoming personally liable for the company’s debts.

How can we help?

As a full service firm, Grant Thornton has access to both tax and insolvency professionals who regularly work with clients and their advisors to identify the best available suite of options when dealing with a DPN.