The ATO began writing to directors early 2022 in relation to unpaid tax. The tax office intended on informing directors about the risk of their personal liability becoming ‘enlivened’ for unpaid business tax debts. Directors should take action or they are at risk of receiving a Directors Penalty Notice (DPN).
We’re bombarded with letters including Directors Penalty Notice styled ‘warning letters’ and threats by the ATO to report/disclose tax debts of over $100k to credit reporting bureaus (a recent feature for the ATO to help ensure company’s comply with taxation obligations).
‘Warning Directors Penalty Notice – DPN letters’ will continue to be sent to directors if that company has not met its obligations for all or either of PAYG withholding tax, Superannuation Guarantee Charges (SGC) and GST.
So far, approximately it is estimated that between 60,000 and 90,000 of these tax demand letters have been issued.
Letters notify the directors that the ATO is assessing whether to issue them with a Directors Penalty Notice – DPN (or what type of DPN); which if issued, enlivens the director’s personally liable for the unpaid debts of their business. Directors are automatically liable for tax debts, but they are given the opportunity to avoid personal liability attachment if lodgements are made (discussed below) and/or they /remit’ upon their tax debt.
The company must provide evidence that it is actively managing the outstanding debts – however, we have seen instances where this is being done via one tax office department yet a DPN has been issued by another ATO department (seemingly unaware directors are being proactive).
The ATO’s Approach has been gentle to Date…
The ATO issues warning letters to ensure that directors are aware of their obligations and to ensure the company’s liabilities are paid and dealt with. Otherwise action is taken by the ATO if they fail to comply, communicate of cooperate (again, quite worryingly, we’ve seen Directors Penalty Notice – DPNs issued even where directors are attempting to manage such tax debts).
The ATO warning letter might seem daunting, however it is far more preferable than an actual DPN and the ATO is providing an opportunity for the directors to be proactive and avoid escalation.
We are advised however, that the times for ‘warning letters’ is coming to and end and already the ATO has issued more than 50,000 DPNs since 1 June 2022.
Types of Directors Penalty Notice – DPNs
There are two types of Directors Penalty Notice – DPNs:
1. The first is a 21 day DPN which is also referred to a as a ‘Non-lockdown DPN’ where the director receives a warning after which they have 21 days to act to avoid liability (small business restructuring 5.3B, voluntary administration 5.3A or simply liquidate the company). The timer starts the date the stamp is licked – so it may sit in an ATO employee intray for 2 days before being entrusted to Australia Post to deliver in a timely fashion. Upshot is, you may only get 14 days in reality. Theoretically, there are defences but there are NO EXCUSES.
A Director will be issued with a Non-lockdown DPN if:
- the business activity statements (BAS) were lodged within 3 months of being due;
- the SGC statements were lodged within 1 month and 28 days after the end of the quarter that the amounts due relate to; and
- the company has not paid the relevant amounts outstanding.
After receiving this 21 Day Directors Penalty Notice – DPN; to avoid personal liability for the debt/s, the director can:
- pay the debt;
- appoint a Small Business Restructuring Practitioner, which may be an option for companies with a total ATO debt of under $1 million
- place the company into voluntary administration or take steps to wind up the company
2. The second type is a Lockdown DPN which serves the director with an automatic personal liability notice. It is effective as soon as the ATO serves it on the director.
A director will be issued with a Lockdown DPN if the company has not:
- met its obligations for PAYG/GST
- paid its SGC obligations
- lodged the company tax returns within three months of the due date
With a Lockdown DPN, the director’s personal liability can only be avoided if the debt is paid.
Defences to a DPN – Directors Penalty Notice
A company’s director will have a defence to a claim by the ATO under a DPN if they can establish that the relevant debt was not paid due to one of the following reasons:
- an illness or another acceptable reason
- all reasonable steps were taken by the director to pay the outstanding PAYG or GST
- all reasonable steps were taken to appoint a voluntary administrator or wind up the company
- all reasonable steps were taken to ensure that the company complied with its obligations to pay the outstanding debts
- the director was not in control of the company at the time the debts arose
We have found there is little in the way of excuses due to directors already being liable for the company’s tax debt – the DPN simply enlivens this liability (as mentioned previously).
Therefore, expert legal opinion should be sought before embarking on an attempt to contest the ATO DPN.
Outgoing and newly appointed directors
DPNs may be issued to a director who has resigned but was a director at the time that the unpaid debts were incurred. DPNs may also be issued to new directors who have been acting in that capacity for more than 30 days.
Therefore, before deciding to consent to a director or board appointment make sure you do your due diligence – do this within 30 days of appointment.
Directors may find themselves personally liable to repay the company’s debts if they do not comply with a DPN which enlivens their liability for company taxes. The ATO may seek to recover the unpaid amounts directly from the director and/or recover the amount subject of the DPN from the realisation of the director’s personal assets.
In this instance, directors should always seek professional advice with regards to their personal financial position to negoatiate with creditors and minimise the impact of the ATO’s recovery action.
Avoidance of Directors Penalty Notice – DPNs and recovery action
The ATO has announced that it wants to work with taxpayers about unpaid debts and work to resolve the debt rather than take enforcements action so:
- if you have received a ‘warning DPN’ notice, DO NOT ignore it and seek advice immediately;
- similarly, if you have received a DPN, seek advice from us as soon as possible to avoid recovery action against your personal assets.
Our message is: don’t stick your head in the sand — even if you can’t pay the full amount owed straight away, please contact us or a professional to discuss and we will work with you to set up an appropriate payment arrangement.
ATO deputy commissioner Vivek Chaudhary
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I sincerely apologise to John Winter for the harm, embarrassment and distress caused by my publication of the article titled “Directors Penalty Notice – ATO Tax Debt? Directors beware of the DPN, ARITA CEO & Greedy Liquidators…” (and substantially similar articles or posts on other platforms), which made unsubstantiated attacks on John Winter. My allegations were made without foundation and I accept that my allegations were false, which I retract without reservation.