Director Penalty Notices Explained

With the ATO issuing an ever-increasing number of Director Penalty Notices (“DPN”) as they ramp up their post-COIVID debt collection activities, it’s a good time to refresh what a DPN is, how to avoid getting one, and what a Director can do if they received one.?

What is a DPN?

A DPN is a notice that the ATO can issue to a Director of a company. This notice can potentially make the Director personally liable for a penalty that is equal to the overdue taxation debts of the Company, including unpaid PAYG, GST and SGC amounts.?

Why is personal liability bad?

Ordinarily, Directors of a company have no liability for company debts. If the company is unable to pay its debts, then creditors miss-out.?

Personally liability means a Director has to be pay the debt out of their own money, making things like their home available to the ATO.?

This is obviously something best avoided.?

Types of DPN

There are two types of DPN’s that the ATO can issue, and the options available to a Director differ depending on the DPN received.

The types of DPN, and when the ATO can issue them, are:

A Non-Lockdown DPN, which can be issued when a company has lodged its Business Activity Statements (BAS) and Instalment Activity Statements (IAS) within three months of the due date and Superannuation Guarantee Charge (SGC) statements within one month and 28 days after the end of the quarter AND has not paid the debt.

A Lockdown DPN, which can be issued when a company has not lodged their BAS, IAS, or SGC statements within the above timeframes AND has not paid the debt.

While no DPN is good, you should think of the Non-Lockdown DPN as the ‘better’ DPN AND the Lockdown DPN as the ‘worse’ DPN.?

In both cases, the company must have failed to pay a debt to the ATO for a DPN to be issued.?

Option when a DPN is received

The only option available to a Director who receives a Lockdown DPN is to pay the penalty, or seek relief under one of the statutory defences (which is often very difficult).

For a Non-Lockdown DPN, the ATO will provide Directors with 21 days to take one of the following actions to avoid personal liability:

• the company pays the unpaid amount to the ATO;
• the company goes into administration;
• the company appoints a small business restructuring practitioner (“SBRP”);
• the company goes into liquidation.

If the Company takes one of these steps within the 21-day period, the ATO must remit the Director Penalty, meaning there is no personal liability.?

How to avoid a DPN

The only way to avoid a DPN is to pay all of the Company’s PAYG, GST and superannuation obligation on time. If any debts remain unpaid past the due date, the ATO has the option of issuing a DPN.?

Avoiding a lockdown DPN is a little easier, just make that all the Company’s Business Activity Statements (BAS), Instalment Activity Statements (IAS), and Superannuation Guarantee Charge (SGC) statements are lodged on time.?

Where does a DPN get sent?

The ATO will send a DPN to the address for the Director that is registered with ASIC. I have seen numerous cases where a Director did not receive a DPN, and therefore couldn’t act to avoid personal liability, because they had not updated their address with ASIC.?

If you have unpaid ATO debt, take the time to check your address with ASIC is correct and update it if required.?

What to do if you receive a DPN?

When a Director receives a DPN, it is vital that they seek professional advice as soon as possible. A non-lockdown DPN only provides a Director with 21 days to take action to avoid personal liability, and this time goes quickly, especially if you are considering restructuring the business by appointing a SBRP or Administrator.?

In the first instance, reach out to your usual trusted advisor, like your accountant or solicitor. They should be able to put you in touch with someone who can provide you with specialist advice, if needed.

DPN Tops Tips

While the best way to avoid a DPN is to pay all tax and superannuation liabilities on time, it’s a reality of business, especially for Micro, Small, Medium and Family Businesses, that this isn’t always possible. If that’s the case, Director’s can still take steps to protect themselves:

1 - Avoid a Lockdown DPN - Lodge all of your IAS, BAS and SGC statements on time, even if you cannot pay the debt.?

2 - Make sure you know if a DPN is issued - Update the address for Directors with ASIC and make sure you check the mail.?

3 - Keep your options open - If you can afford to make payment of the entire debt, always pay superannuation liabilities first. If these aren’t paid, the company loses the option to appoint a SBRP, which is often the best option for small businesses facing taxation debts.?