The first half of 2022 saw the Australian Taxation Office (ATO) significantly increase its debt collection activities and impose penalties for non-compliant company reporting obligations and payments. The ATO is assiduously pursuing these penalties by issuing Director Penalty Notices (DPN) on director/s of non-compliant companies.
Background – what is a director penalty notice?
A DPN is issued by the ATO under Division 269 of Schedule 1 of the Taxation Administration Act 1953 (Cth) to directors of a company if the company has failed to meet certain reporting obligations and payments, including:
- If the company fails to report or pay its Pay as You Go Withholding (PAYGW) obligations within three months of its due date.
- If the company fails to report or pay superannuation to their employees within three months of the corresponding lodgement date.
- If the company fails to report or pay its GST obligations.
A director is responsible for ensuring that a company’s taxation and superannuation obligations are reported and paid on time, regardless of whether the director is actively involved in the company’s day-to-day operations. If a company fails to remit tax amounts for PAYGW, SGC and GST by the relative due dates, the ATO has the power to recover these amounts from a current or former director personally.
Non-payment of a company’s tax liabilities is an early sign of the company’s future financial collapse. Generally, companies in financial difficulty or those with continuous poor cash flow may use their tax withholdings to pay suppliers or contractors so the company can continue to trade rather than pay the ATO.
The corollary of a DPN means that a director can become personally liable for their company’s lack of tax reporting and payment compliance.
The Director’s Obligation
Once a director is issued with a DPN, the director is under the same obligation (the “parallel obligation“) as the company for tax reporting and payment. Until the director causes its company within 21 days of the date of the DPN (not the date a director receives the notice) to take one of several steps:
- First, remit the amount due in the DPN.
- Put the company into voluntary administration.
- Put the company into liquidation; or
- Appoint a small business restructuring practitioner.
Suppose a director does not cause their company to take one of the above steps within 21 days. In that case, the director is personally liable for the tax the company has failed to pay. The ATO may recover the penalty (total amount of the unpaid company’s tax) from the director via legal proceedings.
It’s decision time -director penalty notices
Undoubtedly, the Australian Taxation Office (ATO) took a compassionate approach to debt collection at the height of the unprecedented COVID-19 lockdowns, allowing small businesses more time to get on top of their tax debts.
While the economy is still experiencig ongoing effects of the pandemic, the recently appointed Labor government is pushing forward with plans to culminate “a better future for all Australians”. But, unfortunately, those ambitious plans will cost a sigicant sum of money.
Whether the change in government was the key trigger or not, there has been a significant increase in enquiries concerning DPNs, and in early August DPNs were being issued at 120/day.
Given that there are only days left to deal with a director penalty notice, we always recommend that you should immediately contact your financial planner to discuss your options.
There are two classifications of DPNs, a non-lockdown DPN and a lockdown DPN.
Non-lockdown director penalty notices
A non-lockdown DPN is issued to directors who lodge their business activity, instalment activity or superannuation guarantee statements within three months of the required date but their PAYG withholding, net GST, or SGC debts remain unpaid.
If issued with a non-lockdown DPN, the director has four options to avoid personal liability:
- Remit payment of the total amounts outstanding, a payment plan is not sufficieent to avoid liabililty.
- Instate a voluntary administrator.
- Nominate a small business restructuring practitioner.
- Appoint a liquidator.
Assuming the director doesn’t have a valid defence, as outlined in sections 269-35 of Schedule 1 of the Taxation Administration Act 1953 (The Act) or the financial capacity to pay the total amounts due, the critical question becomes: is the business viable moving forward and worth saving?
If the business is viable moving forward, the director should consult a financial planner about appointing a voluntary administrator or a business restructuring practitioner to undertake a corporate restructuring.
If the business is no longer viable, appointing a liquidator to wind up the company is likely the best option.
Lockdown director penalty notices
A Lockdown DPN is issued to directors who fail to lodge their business activity, instalment activity or superannuation guarantee statements within three months of the required lodgement date.
Unless the director has a sound defence, as outlined in sections 269-35 of Schedule 1 of the Act, for lockdown DPNs, the penalty permanently locks down the director. There is no ability to remit the penalty other than by paying the debt in full.
As a result, if the company or director does not have the financial capacity to resolve the debt, then the director should contemplate personal insolvency options, such as:
- A debt agreement.
- Personal insolvency agreement.
Regardless of the type of DPN your client receives, they only have 21 days to act on the notice. So please do not ignore the notice, as it’s now decision time!
Vogue Advisory Group – keeping you up to date with regulations
If you need help to ensure your business abides by new regulations, please contact us, and one of our experienced financial advisors can assist you.