penalty

WHAT IS A DIRECTOR PENALTY NOTICE?

In addition to potential liability for insolvent trading, company directors need to be aware of their potential personal liability if their company fails to remit certain amounts as and when due.

Directors will become personally liable when a company fails to remit amounts withheld under the PAYG withholding system or fails to meet its superannuation guarantee obligations.

This personal liability arises through the issue by the ATO of a Director Penalty Notice (DPN) under s. 222AOE of the Income Tax Assessment Act. If not complied with, a DPN makes the director it was issued to personally liable for the amount that the company should have paid, through imposition of a penalty.

The director’s PAYG withholding credits can also be reduced/taxed as part of the process.

The Commissioner is using the Director Penalty Notice provisions to pursue directors more and more.

The Commissioner of Taxation will usually first make a formal demand on the company seeking payment. If the company fails to comply with the notice, at the Commissioner’s discretion, a DPN may be served.

2 TYPES OF DPN

There are 2 types of DPN:

1. non-lockdown DPN – issued when statements have been lodged (within 3 months of the due date) but debts are unpaid; and
2. lockdown DPN – issued where statements have not been lodged (within 3 months of the due date) and debts are unpaid

HOW TO AVOID LIABILITY

A director’s liability under the DPN is remitted if, within the 21 days stated in the DPN, the company either:

• pays the amounts due to the ATO in full*,
• is placed into Administration,
• appoint a small business restructuring practitioner and commence the small business restructuring processor
• has a Liquidator appointed.

These 4 options are available for non-lockdown DPNs only.

The liability will not be remitted if the company has failed to report its PAYG withholding liability, GST or superannuation guarantee shortfall etc within 3 months of the lodgement day (and the DPN is thus a lockdown DPN). This encourages timely reporting.

Payment in full is therefore the only solution for a lockdown DPN.

Importantly:

•  The 21 days cannot be extended.
• Notice is given on the day the DPN is issued, not when it is or is likely to have been received.
• A DPN is sent via ordinary mail to the last recorded residential address on the ASIC database – so these details need to be kept up to date as actual non-receipt of a DPN is not a defence.
• The DPN provisions can also apply to new directors where, if after 30 days of their appointment, the company has not discharged its relevant liabilities.
• A DPN can be served on a director’s registered tax agent.
• Resigning as a director at or before the due date is no escape from the DPN regime.

* note that entering into a payment arrangement in relation to a debt does not make the debt cease to be due and payable

Defences may be available where recovery proceedings are subsequently instituted against a director following non-compliance with a DPN.

All directors must ensure they stay completely abreast of their company’s affairs and must ensure the company meets all relevant obligations at all times.

This is why having good procedures and good advisors – whether legal, accounting, financial or otherwise – can prove invaluable.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to bankruptcy/insolvency, litigation and dispute resolution or any commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.