As the Australian Taxation Office (ATO) continues to ramp up its recovery actions throughout 2024 and into 2025, we can expect a significant increase in Director Penalty Notices (DPNs). The ATO is aiming to recover around $30 billion in overdue debt, much of which comes from small businesses.
For Directors, it’s crucial to understand that DPNs are a powerful tool the ATO uses to hold them personally accountable for certain unpaid tax liabilities of their company. The taxes that a DPN can cover include:
- Goods and Services Tax (GST)
- Pay As You Go (PAYG) Withholding tax
- Superannuation Guarantee Charge (SGC)
There are two types of DPNs that Directors should be aware of: Lockdown DPNs and Non-Lockdown DPNs. Failing to address either type can result in personal liability for the company’s tax debt. Let’s break down what each entails:
Lockdown DPN
A Lockdown DPN can be issued when a company fails to lodge its tax returns (e.g., BAS, IAS, SGC Statements) within three months of the due date. For instance, if the September quarter BAS is due on October 28 but isn’t lodged until January 29 or later, a DPN may be issued for that period’s GST or PAYG liabilities. In this case, the Director has no choice but to pay the tax debt in full.
Non-Lockdown DPN
Non-Lockdown DPNs apply when a company lodges the required tax returns within three months but fails to pay the outstanding liability. In these cases, Directors have 21 days to take action to avoid personal liability, such as:
1. Appointing a Voluntary Administrator
2. Appointing a Small Business Restructuring Practitioner
3. Appointing a Liquidator
4. Paying the debt in full
Defences for Directors
There are defences available to Directors who receive a DPN, including:
- Inability to manage the company due to illness or other reasons
- Taking all reasonable steps to ensure the company met its tax obligations
- Taking all reasonable steps to appoint an external administrator
- Ensuring the company complied with its superannuation obligations
However, establishing these defences can be challenging, and Directors should seek expert advice promptly.
Key Considerations for Directors
Beyond the immediate impact of DPNs, there are several important factors to keep in mind:
- Former Directors can still be held liable for a company’s tax obligations through a DPN.
- Newly appointed Directors can also be liable for debts incurred before their appointment.
- A DPN is a joint liability, meaning each Director can be pursued individually for the full amount of the company’s debts.
- Once a DPN is issued, the ATO has various enforcement options, including personal bankruptcy and garnisheeing.
- At I&R Advisory, we’ve seen the ATO pursue debts that date back more than 20 years.
How We Can Help
At I&R Advisory, we regularly assist clients with DPNs, providing expert guidance on the available options, from negotiating payment arrangements to formal insolvency solutions.
If you’d like to discuss your situation or explore your options, feel free to reach out for a no-obligation chat: www.iandradvisory.com.au
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