As a result of the COVID-19 pandemic, the ATO placed a temporary hold on taking enforcement action. This position has changed and the ATO has recommenced enforcement action. Accordingly, it is timely to have a ‘refresher’ on the director penalty regime.
What is a director penalty notice?
A director penalty notice (“DPN”) is a notice issued by the ATO to a director holding the director personally liable for certain taxation obligations which have not been met by the company.
There are two types of DPNs: (i) a non-lockdown DPN; and (ii) a lockdown DPN.
Non-lockdown DPNs
A non-lockdown DPN may be issued by the ATO to a director when a company has lodged its Business Activity Statement (“BAS”) and any Superannuation Guarantee Charge (“SGC”) statements by the due dates but failed to pay its PAYG withholding liabilities, Goods and Services Tax or SGC on time.
If a non-lockdown DPN is issued, a director avoids personal liability if he/she within 21 days:
pays the unpaid tax liabilities (or causes the company to pay those liabilities);
causes the company to enter into administration or liquidation; or
causes the company to appoint a small business restructuring practitioner (“SBR”).
Importantly, a director cannot comply with a DPN by simply entering into a payment arrangement with the ATO (noting that option used to be available to directors).
Lockdown DPNs
A lockdown DPN may be issued by the ATO to a director when a company has failed to lodge its BAS or SGC statements by the due dates and has failed to pay its PAYG withholding liabilities, GST or SGC on time.
If a lockdown DPN is issued, a director avoids personal liability if he/she within 21 days pays the relevant taxation liabilities (or causes the company to pay those liabilities).
Defences
If a DPN is issued to a director, defences may be available. In broad terms, such defences include:
that a director has not participated in the management of the company due to ill health or some other good reason (and it would be unreasonable in the circumstances to expect such participation);
that a director has taken all reasonable and available steps to ensure compliance; and/or
in respect of SGC liabilities only, that a company has taken reasonable care in applying the law concerning its SGC liabilities in a way that was ‘reasonably arguable’.
Consequences
If a DPN is not complied with, the ATO may (among other things) commence legal proceedings against a director.
The ATO may also seek a garnishee order against any third party that owes money to a director and offset any of a director’s tax credits against the director’s penalty.
Indemnity rights
If a director complies with a DPN, he/she will have rights against the company (by way of indemnity, subrogation, contribution or otherwise). Such a director may also have rights of contribution against other directors.
How can we help
Cowell Clarke can assist with a range of issues associated with DPNs. If you would like assistance in this area, please contact us and a member of our Dispute Resolution team will be in touch.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.