This first half of 2022 has seen the Australian Taxation Office (ATO) significantly increase its debt collection activities and the imposition of penalties for non-compliant company reporting obligations and payments.  The ATO is actively pursuing these penalties by issuing Director Penalty Notices on director/s of non-compliant companies.

A Director Penalty Notice (DPN) is a notice issued by the ATO under Division 269 of Schedule 1 of the Taxation Administration Act 1953 (Cth) to the directors of a company if the company has failed to meet one or more certain reporting obligations and payments, including:

1. Pay as you go withholding (PAYGW) – If the company fails to report and/or pay its PAYGW obligations within 3 months of its due date.
2. Superannuation guarantee charge (SGC) – If the company fails to report and/or pay superannuation to their employees within 3 months of the respective lodgement date.
3. Goods and services tax (GST) – If the company fails to report and/or pay its GST obligations.

A director has a responsibility to ensure that a company’s taxation and superannuation obligations are reported and paid on time.  This is regardless of whether the director is actively involved in the day-to-day operations of the company.  If a company does not remit tax amounts for PAYGW, SGC and GST by the due date, the ATO has power to recover these amounts from a current or former director personally.

Non-payment of a company’s tax liabilities is an early sign of the company’s future financial collapse.  Generally, companies in financial difficulty or those with continuous poor cashflow may use their tax withholdings to pay suppliers or contractors so the company can continue to trade, rather than paying the ATO.

The corollary of a DPN means that a director can become personally liable for their company’s lack of tax reporting and payment compliance.

The Director’s Obligation

Once a director is issued with a DPN, the director is under the same obligation (the “parallel obligation”) as the company for the tax reporting and payment – until the director causes n  its company within 21 days of the date of the DPN (not the date a director receives the notice) to take one of several steps:

1. Remit the amount due in the DPN;
2. Put the company into voluntary administration;
3. Put the company into liquidation; or
4. Appoint a small business restructuring practitioner.

If a director does not cause its company to take one of the above steps within the 21 days timeframe, the director is personally liable for the amount of tax that the company has failed to pay and the ATO may recover the penalty (total amount of the unpaid company’s tax) from the director via legal proceedings.

What Must You Do?

A) Do not ignore a DPN

Whether you are a new, existing or retired director of a company, it is very important not to ignore a DPN once you or your tax agent receives a DPN.  A failure to respond and action a DPN can very quickly be escalated into ATO legal proceedings against you.

If you are issued with a DPN, we recommend you seek legal advice immediately to determine an appropriate course of action.

B) Consider whether you have a defence to the DPN

A director should also consider whether his/her circumstances give rise to a defence to the DPN.

We can assist a director put forward written submissions to the ATO outlining his/her defence to the DPN, including:

1. the director did not take part (and it would have been unreasonable to expect that the director took part) in the management of the company during the relevant period because of illness or some other acceptable reason; or
2. the director took all reasonable steps, to ensure that the company had attended to its tax reporting and payment obligations – in determining what were the reasonable steps – one must consider how long the person was a director and took part in the company’s management given all the circumstances.

C) Manage the size of the ATO debt or payment

If a director has been issued with a DPN, one of the director’s options is to cause the company, within 21 days from the date of the DPN, to pay the total amount of the tax that the company has failed to pay (the penalty) in full.

If the penalty is too large and the director does not want to take the alternative courses of action, we can negotiate a manageable payment arrangement with the ATO on behalf of the company.  However, a payment arrangement accepted by the ATO for the tax liability does not relieve the director’s obligation under the DPN or being personally liable for the penalty.  Rather, a payment arrangement with the ATO merely prevents the ATO from commencing legal proceedings against the director to enforce the director’s penalty.

We can also assist with managing the accrual of any general interest charge (GIC) imposed on the company as a result of the outstanding tax liabilities.

If a director makes payment in full of the company’s tax liability in order to relieve himself/herself of personal liability – the director has a right of indemnity as against the company itself and also a right to seek contributions from other directors (if there is more than one director of a company) as if they were jointly and severally liable.  Separately, it is worth noting though that if the director causes the company to pay the tax liability and on a later date the company is placed into liquidation, the director may be found liable under s. 588FGA of the Corporations Act 2001 (Cth) if the payment under the DPN was a voidable transaction.

D) Put the company into voluntary administration or liquidation

If a director has been issued with a DPN and is unable to cause the company within the 21 days timeframe to pay the total amount of the tax that the company has failed to pay, the director must cause the company to be placed either into voluntary administration or into liquidation.

Both voluntary administration and liquidation are types of external administration for a company and depending upon which path the director causes the company to proceed down will be determined by your company’s financial standing and surrounding circumstances.  We will be able to assist a director understand these alternative avenues of a DPN and what it means for the director and the company based on its individual circumstances.

If an administrator or a liquidator is not appointed to the company, another alternative option available for the director is for the company to appoint a small business restructuring (SBR) practitioner.  A company may, by writing, appoint a SBR practitioner provided certain eligibility criteria for restructuring are met and the board of the company has resolved that the company is insolvent or is likely to become insolvent at some time in the future.  Proceeding down this path has certain limitations and can only occur if certain events have not happened.  To explore whether this option is available to your company, please contact our team to provide you with advice around appointing a SBR practitioner.

We cannot stress enough the importance and seriousness of a DPN and urge any director who is issued with a DPN to immediately reach out to Coleman Greig Lawyers’ taxation and insolvency team to assist with actioning and responding to the DPN.