DPNs unveiled: a quick guide for company directors

There's been a lot of talk lately about "ATO DPNs"; the regime that refers to the Director Penalty Notice (DPN) system implemented by the Australian Taxation Office (ATO). It operates to hold directors personally liable for certain tax debts of the company, including unpaid Goods and Services Tax (GST), Pay As You Go (PAYG) withholding tax, and Superannuation Guarantee Charge (SGC) debts.

With those definitions out of the way...the regime aims to ensure prompt payment of these debts and discourage companies from evading their tax obligations. Directors need to be aware of their responsibilities (including the relevant filing deadlines for each category of the company's tax debts) and the potential consequences of non-compliance with its specific tax obligations.

Impact on directors' personal liability

The issuance of a DPN can significantly impact directors' personal liability. Under the DPN, the ATO has the power to pierce the corporate veil, making directors personally responsible for the unpaid tax debts of the company, in full.

Directors may be held accountable for these debts, even if the company enters liquidation or gets de-registered, or even if they've resigned as a director but the debt was incurred during the time they were directors.

New directors can avoid liability for debts due prior to their appointment in some circumstances (if the company acts quickly).

It is essential that directors understand the extent of their personal liability and the potential financial risks involved.

Triggering factors for issuance of DPNs

The issuance of a DPN can be triggered by either:

1. Failure to pay GST, PAYG withholding tax, or SGC debts; or
2. Failure to lodge the necessary tax returns within specific deadlines.

Directors must be aware of these and ensure timely reporting and payment of these tax obligations to avoid the consequences of a DPN.

As to timing; whilst relying on a qualified expert in the field doesn't absolve a director of liability in the event that they do not meet the deadlines, it is advisable to ensure an extra "line of defence" in mitigating the risk associated with being issued a DPN (that is: an extra set of eyes reminding directors when there filings are due).

Types of DPNs

There are two types of DPNs that determine the options and consequences for directors on the receiving end.

Lockdown DPNs: issued when tax debts remain unreported beyond specific due dates. With a lockdown DPN, directors become personally liable for these debts, even if the company enters liquidation (or another insolvency process) or gets de-registered. The options for directors in this situation are limited to either:

1. paying the debt using their personal assets; or
2. causing the company to pay the debt (if it is still operational).

If the debt remains unpaid, the consequences can include legal action, debt recovery measures, and potential damage to the director's credit rating.

Non-lockdown DPNs: the company has reported its tax debts within the required time frames but they are unpaid. In this case, directors can avoid personal liability by either:

1. paying the debt; or
2. placing the company into voluntary administration or liquidation.

Consequences

If, within 21 days after service, the debt is still unpaid, whilst directors are not automatically personally liable for the debt, they may face the following consequences:

1. Legal proceedings: The ATO may take legal action to recover the amount specified in the DPN, potentially leading to bankruptcy proceedings;
2. Garnishee notice: A garnishee notice may be issued against the director's personal bank accounts, allowing the ATO to collect funds directly from those accounts to satisfy the debt; and/or
3. Set-off of personal tax credits: The ATO can offset the director's personal tax refunds or other credits against the outstanding debt, reducing or eliminating any potential refunds or credits owed to the director.

What to do if you receive a DPN?

If you receive a DPN, it is crucial to act promptly. You have 21 days from the date of service (so it's important to ensure your ASIC lodgments are up to date and any change of address has been registered!).

Once received, assess the notice carefully, consult with your advisers and seek advice to understand your options and potential defences which may be available. You may consider exploring insolvency options, or disputing the validity of the DPN if there are legitimate grounds to do so - your adviser will be able to help you navigate the process and advise how to minimise the impact on your personal liability as a director.

By being proactive in meeting tax obligations, staying informed about triggering factors, and seeking professional guidance when necessary, directors may avoid personal liability. As I always say: "prevention is better than a cure"!

If you are a director and have received a DPN, are concerned about you position, and want advice on"where to from here": please reach out!

Phoebe Pitt

Special Counsel, Commercial Disputes & Insolvency

[email protected] / 0466 553 643

https://www.dhirubhai.net/in/phoebepitt/