New figures from the ATO reveal that it issued 18,500 Director Penalty Notices (DPNs) in 2022 and disclosed the tax debts of almost 500 businesses to credit referral agencies. This new weapon waved in $714 million tax debt payment for the Government agency, and an additional $5.4 billion actively managed under payment arrangements. It also saw a 51% increase in company insolvency/voluntary administration reported to ASIC over the second half of 2022 compared to the previous year.
As a company director, one must exercise their powers with reasonable care, act in good faith, and don’t misuse their positions to gain advantages. Falling behind paying any of the following company tax debts can be seen as a breach of director duties, and worse see directors personally liable under a Director Penalty Notice issued by the Australian Taxation Office (ATO)
I. Pay As You Go Withholding (PAYGW)
II. Superannuation Guarantee Charge (SGC)
III. Goods and Services Tax (GST)
IV. Luxury Car Tax (LCT)
V. Wine Equalisation Tax (WET)
Given the devasting consequences of personal liability for directors under the DPN, let’s look further into the rules, what can be done to avoid these penalties, and what to do legally if penalised. Let’s find out to stay updated.
Rules & Regulations of Director Penalties
If a company fails to pay its taxes by the due date, the people in charge of the company could be held personally responsible for the amounts owed by way of ATO giving a Director Penalty Notice (DPN) to the company directors. The DPN directly goes to the director’s address registered with ASIC or the last known ones. It provides all the information about unpaid information and options available to make the payments.
There are two types of notices that Australian tax office holds for directors. The first acts as a warning, and the second is a straightforward ‘Pay The Debt’ notice.
21-Day Traditional Notice
21-day director notice is for companies that did not paid the SGC or PAYGW liabilities on time. The directors have precisely 21 days to act from when the statement is issued. To avoid personal liability, the directors can either –
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Pay the debt.
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Place the company into voluntary company administration or liquidation.
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Create a payment plan with the ATO.
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Appoint a business restructuring practitioner if the total debt is under $1 million.
Lockdown Penalty Notice
This Lockdown Director Penalty is for failure to pay tax liabilities in full within 3 months. Also, if the company hasn’t reported it to the ATO within three months, then they will get the same notice even paid.
When a company gets a lockdown penalty notice, the director only has one option: to pay the debt in full within the given time frame. They also can pursue relief under one of the statutory defenses if they have a valid defense.
Possible Defense Against a Director Penalty Notice
The ATO acknowledges that sometimes mistakes can happen. So as a director, you get some defenses on the following grounds –
Illness
Due to illness, a director may not be involved with the company’s management during the nominated period. Based on the non-participation with management at that time, the director may argue and avoid personal liabilities with solid proof.
Reasonable Steps
A director may try to demonstrate all reasonable steps have already been taken to ensure the company’s flexibility and compliance. Such steps can include but not limited to –
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Tried to appoint an administrator of the company.
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Tried to make the company fulfil its obligations to pay the tax debt.
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Tried to nominate a small business restructuring practitioner or liquidator.
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Wind up the company.
Best Practices for Directors to Avoid Future Director Penalties
The best practice to avoid DPNs is to develop good habits to ensure that the company meets its tax commitments on time, and it will prevent future notices from being issued.
Consider the following practices to avoid warnings –
Review Company Policies
You should regularly review company policies. If the company is not meeting its financial commitments, there are probable unpaid tax as well. Also, check the company policies remain up-to-date and compliant with government regulations.
Keep Detailed Company Records
Maintain a complete book of all business payroll and superannuation-related record. You might need those records in the future when referring back to them.
Seek Professional Advice
Sometimes, the company can not meet financial commitments such as PAYGW or any issues related to employer obligations. If you observe these situations, seek expert advice from a lawyer or consultant familiar with the director penalty laws in Australia.
Company Information
Constantly update the latest information about the company, including contract and address details to the ATO. As a result, any non-receipt of a penalty notice on time can be estabslished as a defense when discussing the DPN with ATO.
Final Thoughts
Overall, director penalty notices are essential Government mechanism to ensure Australian companies pay their due taxes on time. There’s no doubt the ATO isn’t going to ease off the gears on debt collection any time soon, thus taking preventive measures and seeking professional advice can help company directors reduce the risk of facing a director penalty notice in future.
