Director Penalty Notices – Personal Liability!

Directors are responsible for making sure their company meets its PAYG withholding, net GST and Superannuation Guarantee Charge (SGC) obligations. If a company fails to meet these liabilities by the due date, under tax legislation directors may become personally liable for an amount equal to the company’s obligations. In certain circumstances the ATO may recover from directors by issuing a Director Penalty Notice (DPN). There are two types of DPN.
The first type of DPN known as a “lockdown” DPN, is where the company does not lodge its BAS or IAS within three months from their due dates or does not report its SGC obligations by the due date. The ATO may make an estimate of the unpaid and overdue liability and issue directors a DPN on the estimate. With a “lockdown” DPN the director’s obligation can only be remitted by the company paying the outstanding amount otherwise it will fall to the directors to meet the obligations.

The second type of DPN, commonly known as “non-lockdown” DPN, is where the company lodges its BAS or IAS within three months of the due date or lodges its SGC statement by the due date but does not make payment of its obligations. In this case the ATO may issue a DPN against the directors. The directors can avoid personal liability by ensuring the company does one of the following within 21 days of the date of the DPN:

• paying the debt in full; or
• appointing an administrator under section 436A, 436B or 436C of the Corporations Act 2001 (the Act); or
• appointing a small business restructuring practitioner under section 453B of the Act; or
• the company begins to be wound up within the meaning of the Act.

Directors will have a defence and not be liable for a director penalty if:

• They did not take part in the management of the company during the relevant period because of illness or other acceptable reason;
• They took all reasonable steps, unless there were no reasonable steps they could have taken, to ensure that one of the following happened:
  - the company paid the amount outstanding; or
  - an administrator, a small business restructuring practitioner or a liquidator was appointed to the company.
• in the case of an unpaid SGC liability – 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.

A recent court decision has reiterated the responsibilities of directors for payment of superannuation guarantee. In the decision of Deputy Commissioner of Taxation v Alexander [2020] NSWDC 278, the defendant attempted to avoid liability imposed on him pursuant to issued DPNs for unpaid SGC. The defendant, a director at the time the liability was incurred by the company, argued that he should not be liable because he was not a director with any financial knowledge or involved in the company’s financial affairs generally. His defence was rejected as his obligation to cause the company to comply with the tax legislation arises from his position as a director of the company at the relevant times notwithstanding, his lack of financial knowledge and involvement in the company’s financial affairs. Ultimately the defendant was ordered to pay the judgment debt and costs.

This case shows the importance of ensuring that a company’s superannuation guarantee is reported and paid on time and that directors have obligations regardless of their involvement (or lack of) in a company’s operations. Should a company not able to meet its tax obligations, all directors may be exposed to ATO’s enforcement actions.

In May 2022 the ATO announced that it remains committed to engaging with taxpayers about unpaid tax debts as the economy emerges from the COVID-19 pandemic. Although it is currently the ATO’s preferred approach to work with taxpayers to resolve their situation through engagement rather than enforcement, where taxpayers don’t engage the ATO is taking firmer action including recovery of director penalties.

In addition to these enforcement actions the ATO has recently written to businesses under two key awareness programs – disclosure of business tax debts and the use of DPNs. These programs focus on taxpayers who have not responded to calls and letters – and have significant tax obligations outstanding. The ATO has sent 29,552 awareness letters for disclosure of business tax debts and 52,319 awareness letters about the use of DPNs. For those taxpayers who have not responded and are not engaging, the ATO will move to the next steps. In respect to companies with outstanding obligations the ATO is currently issuing 30 to 40 DPNs each day and expects that to increase.

If you have clients that are finding it difficult to or not meeting their tax obligations, do not hesitate to contact us for an obligation free discussion of your clients’ circumstances and available remedies.

If eligible, it may be an opportune time for a company to take advantage of the small business restructuring regime to restructure ATO and other debts given the ATO’s general support for the process – see https://www.dwadvisory.com.au/news-list/56-newsletter-august-2021 for further information.