Changes to Director Penalty Notices (DPN)
You may be aware that on 29 June 2012, the Tax Laws Amendment (2012 Measures No. 2) Act 2012 received Royal Assent with retrospective effect in an attempt to crackdown on ‘phoenix’ operators.
This article is a refresh on how the DPN regulations now apply.
Previously, a director of a company had a fallback position before the Commissioner of Taxation could enforce personal liability in circumstances that the company has an unpaid Pay As You Go (“PAYG”) liability. The Commissioner of Taxation had to send a Director Penalty Notice under Section 222AOE of the Income Tax Assessment Act 1936 prior to making Directors personally liable. The Notice provided that the penalty will be remitted if:
- the company’s liability has been discharged; or
- the company is under Administration; or
- the company is being wound up
within 21 days from the date of issue of the Notice.
The law has now significantly changed.
The major change in the legislation is that the tax office has now been given the power to collect unpaid superannuation from Directors personally, and Directors are now provided a tight timeframe to avoid personal liability for outstanding superannuation and PAYG tax.
The following is a summary of the changes on how the law now applies.
- The Tax Administration Act 1953 has now been amended to extend the director penalty regime to include outstanding liability under the superannuation guarantee charge (SGC)
The legislation has now changed as it now extends a director’s liability to unpaid superannuation guarantee charge whereby a director is liable to a penalty if the company has not lodged its superannuation guarantee statement and paid the superannuation guarantee charge by the end of the lodgement date. The Commissioner will enforce liability by way of a Director Penalty Notice, providing a period of 21 days before commencing proceedings. The liability will be remitted if the directors take one of the three actions described above (subject to the actions described above occurring within the time-frame as further discussed below in the next point.
- Directors in certain circumstances will no longer be able to avoid personal liability
However, the legislation provides that where 3 months has lapsed after the due date and the liability remains unpaid and unreported, the penalty will not be remitted as a result of placing the company into administration or liquidation. If the liability has been reported, Directors will still be issued with a Director Penalty Notice allowing them 21 days to take certain actions and avoid personal liability.
The following is an example of the new timeline for company Directors to avoid personal liability for a typical company in the first quarter of the year, being 1 January to 30 March. For illustration purposes, let’s say the company reports their PAYG tax on a quarterly basis and the PAYG becomes due and payable on or around the 28th day after the end of the period (28 April). Also, superannuation under the superannuation guarantee charge becomes due and payable on the 28th day after the end of the relevant quarter (28 April). Therefore, the critical day for both PAYG and SGC in this scenario is 28th April and Directors have three months from this date to take certain actions to avoid personal liability.
- The changes apply retrospectively
An important consideration to note is that the changes apply retrospectively for outstanding PAYG obligations at the commencement of the new legislation and a director will no longer be able to have their director penalty remitted by appointing an Administrator or by winding up the company, and will be personally liable regardless, if they are outside the 3 month timeframe. The law does not apply retrospectively for superannuation with exception of superannuation incurred between 1 April 2012 and 30 June 2012.
- Other notable amendments include:
- The Commissioner may also serve a copy of a Director Penalty Notice on the director at his or her tax agent’s address;
- A new director is not liable to a director penalty for company debts until 30 days after they become a director;
- The introduction of a PAYG withholding non-compliance tax for directors and their associates in circumstances that the director and/or their associates claim a PAYG credit in their personal income tax returns for amounts withheld by the failed company. The tax is not recoverable unless the Commissioner issues a Notice to the individual director or associate. It also seems that the Commissioner will have discretion whether to issue the notice or not.
- Moving Forward
Directors need to be aware of the above changes, and take precautions to avoid personal liability. At the very least, Directors need to ensure that;
- They get on top of their lodgements and make sure they comply within the 3 month lodgement period;
- Ensure PAYG and superannuation requirements are paid at least 3 months after the due date, and if these liabilities cannot be paid, consider making an appointment of an external administrator;
- Report on their current residential address with the Australian Securities and Investments Commission (ASIC) to make sure they get the DPN if one happens to be issued;
- Ensure their tax agents are diligent in forwarding all material promptly including the Director Penalty Notice;
- Protect their personal assets.
Disclaimer: This article contains general information. Before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.