Checklist for avoiding Director Penalty Notices

Disclaimer: This content is provided for informational purposes only and should not be construed as legal advice. We have not taken into account your specific circumstances, and any reliance you place on this information is at your own risk. It is strongly recommended that you seek legal advice tailored to your individual situation to address any concerns or questions you may have.

Small and medium-sized business owners need to be careful about their roles as company directors. Let’s break down the risks directors face and what they can do about them.

The tax office in Australia, known as the ATO, can send Director Penalty Notices to directors if their companies owe Pay As You Go (PAYG) taxes. But before they do that, they usually try other ways to get the money back.

Now, here’s the tricky part: When a director gets one of these notices, they only have 21 days to do something about it. If they don’t, they might have to pay the money themselves, using their own stuff like their house or shares.

Directors are responsible for making sure their companies do things like withhold taxes from employees’ pay checks and pay into retirement funds. If the company doesn’t do these things, directors can be personally responsible for the money owed.

Understanding Director Penalty Notices

Director Penalty Notices (DPNs) serve as critical alerts for company directors, signalling potential personal liabilities regarding outstanding tax obligations. There are two distinct types of DPNs: traditional notices and lockdown penalty notices, each carrying its own implications and urgency.

Traditional Notice: Upon receipt of a traditional DPN, directors are granted a 21-day window to take remedial action and avert personal liability. This notice typically arises when a company has overdue Pay As You Go (PAYG) or Superannuation Guarantee Charge (SGC) liabilities. Directors facing this scenario can choose among several options:

1. Payment: Clear the debt within the specified timeframe.
2. Liquidation or Voluntary Administration: Opt for winding up the company or entering voluntary administration.
3. Small Business Restructuring: Consider appointing a small business restructuring practitioner (applicable for companies with debts under $1 million).
4. Winding Up: Initiate steps to wind up the company.

Additionally, directors may negotiate payment plans with the ATO to address tax debts. While such arrangements do not absolve personal liability, adherence to an agreed-upon plan can deter individual pursuit by the ATO. It’s worth noting that this leniency represents a recent departure from past practices, where entering into payment arrangements did not shield directors from personal liability, as affirmed by a 2020 Federal Court ruling.

Lockdown Penalty Notice: In contrast, a lockdown penalty notice triggers immediate personal liability upon service by the ATO, without the grace period afforded by traditional notices. This notice arises when PAYG or superannuation amounts remain unpaid, coupled with a failure to lodge company returns within three months. Directors facing a lockdown penalty notice must settle the debt in full, barring a valid defence. Notably, avenues such as voluntary administration or liquidation do not absolve liability in this scenario.

How to avoid getting a Director Penalty Notice?

According to Director of Tax Communications at H&R Block, Mark Chapman:

Special regimes in TAA sch 1 Divs 268 and 269 enable the Commissioner to recover from the directors of companies unpaid amounts under the PAYG withholding system. Division 268 applies where the Commissioner makes a reasonable estimate of a person’s PAYG liability or the amount of unpaid superannuation guarantee charge for a quarter. Division 269 applies where a company has failed to remit amounts in respect of PAYG withheld, an alienated personal services payment received, a non-cash benefit provided, an estimate under Div 268 or superannuation guarantee charge for the quarter.

Under Div 269, there is a duty on a director of a company to ensure the company:

• meets its obligations to remit amounts

• goes into voluntary administration, or

• begins to be wound up 

If the company fails to undertake one of these options by the due date for the remittance of the deductions or amounts withheld, the directors of the company are each personally liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount of the company’s liability.

Before instituting proceedings to recover, by way of penalty, the unpaid amount of the company’s liability, the Commissioner must give 21 days’ notice.

The person to whom a DPN is sent does not have to be a current director. It is sufficient if the person is in office for at least some of the period before the due date when the company became liable to make the payment.

A director has 3 possible defences against proceedings to recover the penalty:

• they were not involved in the management of the company for a good reason such as illness and it was reasonable for them not to be involved

• they took all reasonable steps to ensure the directors complied, or there were no reasonable steps they could have taken, and

• in relation to unpaid superannuation guarantee charge, the company treated the superannuation guarantee charge legislation as applying to a matter in a way that was “reasonably arguable” and the company took reasonable care in applying the legislation.

In practice, it can be very difficult to satisfy these defences.

The ATO can recover the amounts of the director penalty by:

• issuing garnishee notices
• offsetting any of the director’s tax credits against the director penalties
• initiating legal recovery proceedings against the director to recover the director penalty.

Remission of a director penalty is possible, but it depends on when the PAYGW and net GST payable was reported to the ATO.

If the unpaid amount of PAYGW is reported within 3 months of the due date (or, in the case of new directors, within 3 months of the date of their appointment), the penalty can be remitted by ensuing the company does one of the following:

• paying the debt in full
• appointing an administrator under section 436A, 436B or 436C of the Corporations Act 2001
• appointing a small business restructuring practitioner under section 453B of that Act
• the company begins to be wound up (within the meaning of the Corporations Act 2001).

If the unpaid amount of PAYGW is reported more than 3 months after the due date (or, in the case of new directors, 3 months or more after the date of their appointment), the only way to remit the director penalty is to pay the debt in full. If the unpaid amount remains unreported after 3 months, the corresponding director penalty can also only be remitted by payment in full.

Once the ATO gives the director a DPN, that individual has 21 days to either:

• pay the penalty amounts in full
• arrange a payment plan with the ATO (they can still offset personal credits against this debt during this time).

Here’s another handy checklist from Pears & Heers and Australia Debt Solvers to help directors steer clear of Director Penalty Notices (DPNs):

1. Pay What’s Owed: Make sure any money your company owes is paid on time. This stops things from getting worse.
2. Get Professional Advice: Talk to someone who knows about fixing money problems in small businesses. They can help you figure out the best way forward.
3. Stay in the Know: Keep an eye on how your company’s money is doing. If things start looking bad, you’ll want to know early.
4. Keep Up with Taxes: Make sure to pay the taxes your company owes, like PAYG and GST, on time. And don’t forget to fill out the necessary forms when you’re supposed to.
5. Update Your Details: Keep your address up to date with ASIC so you get important notices on time.
6. Voluntary Administration or Liquidation: Opting for either of these routes, while seemingly drastic, becomes imperative if the company finds itself on the receiving end of a DPN, indicating severe financial distress.
7. Engage a Small Business Restructuring Practitioner (SBRP): This novel category of insolvency practitioner, often denoted as an SBRP, oversees the Small Business Restructuring process. Registration with ASIC as a “registered liquidator” is mandatory for this role.
8. Act Quickly: If you see money problems coming, don’t wait. Get help and try to fix things before they get worse.
9. Don’t Forget Superannuation: Make sure your employees’ superannuation payments are made on time. Otherwise, you could be in trouble with the tax people.

Remember, if you get a Director Penalty Notice, you only have 21 days to do something about it. While paying off what’s owed might seem like the obvious choice, it’s not always that simple. If your company ends up shutting down, you might have to give that money back. So, think carefully and get advice if you’re not sure what to do. It’s a tough situation to be in, but with the right help and quick action, you can get through it.

The information provided here is for general informational purposes only and should not be construed as tax advice. It is recommended that readers consult with a qualified tax professional or advisor to obtain specific advice tailored to their unique situation.

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