Do you know why the Australian Taxation Office (ATO) would issue a Director Penalty Notice (DPN)? The directors have the legal responsibility to ensure that their company meets the taxation obligations.

Under several circumstances the directors will be held personally liable to compensate for the due taxation obligations. Therefore the directors must be vigilant about the obligations of the company towards the government, to avoid legal issues.

This article will give you a brief insight about the DPN and some of the most asked questions related to it.

What is a Director Penalty Notice?

It’s a notice sent by the ATO to the directors of a company, making them personally liable for the unpaid tax obligations of the company. The DPN outlines the unpaid amounts and remission options available to you.

Why would ATO send a Director Penalty Notice?

The ATO must recover the unpaid taxes and the due penalties from the directors of the company if the following obligations are not met.

  • Pay As You Go (PAYG) withholding
  • Super Guarantee Charge (SGC)
  • Goods and Services Tax (GST)
  • Luxury Car Tax (LCT)
  • Wine Equalisation Tax (WET)

For this purpose the ATO will issue a DPN notifying you about the unpaid amounts and mitigation options available.

What are the types of DPNs?

The ATO will basically issue two types of notices depending on the degree of offence made by the company.

The date that ATO post or leave the DPN is considered as the date the notice is given to you.

The ATO will use your address registered with Australian Securities & Investment Commission (ASIC). Otherwise they will use the last known address to send the DPN.

1. Traditional 21 day notice (Non-lockdown)

This notice is sent to the directors when directors have willing taken the steps to submit the following statements on given time periods.

  • Business Activity Statement lodged within 3 months of its due date.
  • Super Guarantee Charge statement lodged within 28 days of the end of the relevant quarter.

A non-lockdown notice will not hold you liable for the company’s debts until 21 days has passed from the notice date. Further you must take one of the following options within the 21 days to ensure that you have taken reasonable actions and avoid penalties.

  • Paying the due debt.
  • Begin to wind up the company (As per the Corporations Act 2001).
  • Appointing an administrator as per the section 436A, 436B or 436C of the Corporations Act 2001.
  • Appointing a small business restructuring practitioner.

2. Lockdown notice

This notice is sent when directors have not taken the steps to submit the above statements within the stipulated time period. If a director receives a lockdown notice he will immediately be held liable for the company’s debts without a 21 day grace period.

When you receive a lockdown notice you have to pay the debt in full. You cannot place the company under voluntary administration or go into liquidation under lockdown notice. Be mindful that you can also receive a lockdown notice when it’s under voluntary administration or liquidation.

Who will be issued a DPN?

As the name suggests, a DPN will be issued to the directors of the company. However the ATO could issue DPNs to the existing directors, new directors and even resigned directors under certain circumstances.

1. Existing directors

Existing directors have the obligation to submit the due statements and pay the taxes on time. The ATO will hold the existing directors responsible for not taking the corrective measures.

2. New directors

The new directors must watch out for the unpaid taxes and obligations of a company when joining it. They can be held liable for the unmet obligations of the company which occurred before the appointment. However the new directors must take one of the options as mentioned above under the non-lockdown DPN within 30 days of appointment to avoid the penalties.

3. Retired directors

Even though you have retired as a director from the company, you will be held responsible for the obligations that were due before your resignation date. They will also be liable if the withholding events leading to liabilities occurred when they were active directors.

What are the defenses against DPNs?

There are several defenses against the DPN as mentioned in the regime, which excludes the directors from personal liability. These defenses can be:

  • Facing an illness or any other acceptable reason which prevented you from taking part in the management of the company during the relevant period.
  • Took all the reasonable steps to ensure that the obligations of the company are met. Or taken one of the following options.
    • Paying the due debt.
    • Begin to wind up the company (As per the Corporations Act 2001).
    • Appointing an administrator as per the section 436A, 436B or 436C of the Corporations Act 2001.
    • Appointing a small business restructuring practitioner.

How will ATO recover the penalties?

  • Issues garnishee orders- This is an order which make it compulsory for the individual or companies who holds your money on your behalf, to remit that money directly to ATO. These entities can be banks, your employer, people who owe you money.
  • Initiating legal actions against you to recover the penalties.
  • Offset your penalties against your tax credits.

What are the consequences of non-compliance?

The DPN will hold the directors personally liable. Therefore the penalties and unpaid amounts will be recovered directly from the directors or their assets.

Key actions to avoid legal offences

  • Submit the BAS and Superannuation guarantee statement on time
  • Ensure that ASIC details are correct and up to date
  • Be proactive and get advices on time from experts when fulfilling the obligations against the government
  • Remain informed about PAYG, net GST and SGC payment obligations

Source: Australian Tax Office [1][2]