Director penalty notice
A tax enforcement instrument issued by the Australian Tax Office to the director of a company that has failed to meet all of its tax obligations. A DPN can make the director personally liable for the company’s tax debts set out in the DPN if no action is taken.
What is this document?
A Director Penalty Notice (DPN) is a tax enforcement instrument issued by the Australian Tax Office to the director of a company that does not meet its Pay As You Go (PAYG) withholding and Goods and Services Tax (GST), Luxury Car Tax (LCT), Wine Equalisation Tax (WET) and Super Guarantee Charge (SGC) obligations. A DPN can make the director personally liable for the company’s tax debts.
The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 extended the director penalty regime to GST, LCT and WET starting from 1 April 2020.
As a director, you are responsible for making sure the company meets its tax obligations, otherwise you will become personally liable for director penalties equal to the unpaid amounts.
Recently appointed directors of a company can be held personally liable for historical tax liabilities if they remain unpaid and unreported within 3 months or more after the date of appointment. Before becoming a director, you should check if the company has any unpaid or unreported ATO liabilities.
As a new director, you will not be liable to director penalties for amounts due before your appointment if, within 30 days starting from your appointment, the company:
- pays their PAYG withholding and/or GST, LCT, WET and SGC debts in full;
- appoints an administrator under section 436A, 436B or 436C of the Corporations Act 2001;
- begins to be wound up (within the meaning of the Corporations Act 2001).
Even if you become a new director and you resign within the 30 day period, you will still be liable for the unpaid tax liabilities of the company that were due before your appointment.
There are two types of DPN:
Issued in cases where the tax liabilities are unpaid but reported to the ATO within three months of the due date. Under a non-lockdown DPN, directors may avoid personal liability if, within 21 days from the DPN date, the company:
- pays the debt or negotiates a suitable arrangement to pay it;
- appoints a voluntary administrator; or
- places the company into liquidation.
Issued to a director who has failed to pay tax debts and also hasn’t reported it to the ATO within three months of the due date.
The only option for directors to avoid personal liability under a lockdown DPN is the company paying the debt within 21 days of the DPN being issued.
What are the options for a response?
When you receive a DPN you have three options to take within 21 days of the DPN being issued:
- pay the debt;
- place the company into liquidation or voluntary administration (for non-lockdown DPN only); or
- file a defence if you don’t believe you should be responsible for the debt of the company.
You can file a defence on the following grounds:
In cases where a director can show that, either through illness or some other good reason, they were not involved with the management of the company and that it was reasonable that they not be involved, the director will be able to escape personal liability.
Directors can defend themselves against personal liability where they can show that they took all reasonable steps to ensure that:
- the company complied with its obligations to pay;
- an administrator of the company was appointed;
- the company began to be wound up; or
- that no such steps were available.
What is the legal effect of ignoring it?
If you, as director, do not take any action within 21 days from the DPN date, the penalty is not remitted and you are liable for the penalty amount until it is paid in full. To enforce this claim, the ATO may then commence court proceedings against you personally.
In addition, the ATO is entitled to seek a garnishee order against any third party that owes you money, or holds money on your behalf, including your personal bank accounts, and also to offset any of your tax credits against the director penalties. Ultimately, the ATO can pursue you until you become bankrupt.
What documents and information do you need to give your lawyer?
If you have been served with a DPN, you should seek legal advice as soon as possible and provide your lawyer with:
- the DPN;
- any receipt or document relating to PAYG withholding and GST, LCT, WET or SGC obligations;
- information regarding your own and the company’s financial situation;
- whether you have grounds for defence;
- any other information requested by your lawyer.