Resolving director liability for company tax debt

Director penalty notice changes and implications

During the COVID-19 Pandemic, the Australian Taxation Office (ATO) suspended the director penalty notice (DPN) regime to support struggling businesses. Since March 2022, the ATO has focused on issuing more DPNs to recover corporate debt. In this article, we outline the difference between non-lockdown and lockdown DPNs and the implications this may have on your business and director duties.

Let’s start at the beginning.

Suppose a director of a company withholds PAYG or superannuation guarantee charge amounts but does not pay them to the Taxation Office. In that case, they can be personally liable and pay penalties equal to the amount unpaid by the company. In this scenario, directors are given a DPN that allows the ATO to recover outstanding tax debts. The notice itself shows the date of notice and the unpaid amount.

As soon as the lodgment date has passed, the ATO can issue DPN’s on directors for any outstanding GST or SGC amounts. There are two types of notices that are issued.

Non-Lockdown DPNs

Non-Lockdown DPNs are seen as traditional DPN’s, which can be issued in circumstances where:

1. All activity statement lodgments have been made within three months of their due date;

2. All SGC statements have been lodged within a month and 28 days after the end of the quarter that the contributable amounts relate to; or

3. Where those amounts remain outstanding.

There are options to avoid penalties for unpaid amounts that have not been reported within 3 months of the due date. If a director acts within 21 days upon receiving a non-lockdown DPN these options include:

1. Company pays debt owed to the ATO;

2. Company appoints a liquidator;

3. Company appoints an administrator; or

4. Company appoints a small business restructuring partner (SBRP).

Lockdown DPN’s

Lockdown DPN’s occur when PAYG or SGC amounts are unpaid, and the director fails to lodge their company returns within three months. These are issued where:

1. Activity statement lodgments have not been made within three months of their due date.

2. SCG statements have not been lodged within a month and 28 days after the end of the quarter that the contributable amounts relate to; and

3. Where the payment requirements have not been met.

When a director receives a lockdown DPN, they must pay the amount listed or rely on any legal defences to the notice based on the circumstances of the company. Some defences can arise if:

• The director was not part, and would be unreasonable to expect the director took part, in the management of the company at times due to health or some other good reason.

• The director took all reasonable and available steps to ensure the company complied with its obligations. The company took reasonable care in applying the law in respect of its SGC liabilities in a way that was reasonably arguable. This applies to SGC liabilities only.

If there are no defences that can be raised, directors remain personally liable for the penalty outlined in the lockdown DPN.

Changes to the DPN regime

During the COVID-19 Pandemic, the ATO temporarily suspended the DPN regime to support struggling businesses. However, in March 2022 it published a notice informing businesses it would be making changes to the regime. These include:

• No more lay-bys for directors.

• Directors of qualifying businesses can now avoid personal liability under non-lockdown DPN by appointing an SBRP,

• For non-lockdown DPN’s the option to avoid personal liability by causing the company to enter a Payment Arrangement has been removed.

Implications for business

Removing the option for Payment Arrangement means directors who receive a non-lockdown DPN are more likely to place the company into administration or liquidation unless they can find funding or some other option to allow the company to pay the underlying tax obligations.

If a company has outstanding debts, the ATO may issue the director with a penalty notice. If these amounts are not paid, the ATO can commence proceedings against the director. This recovery of unpaid amounts will be sought from the directors’ personal assets.

This will have major implications for directors and other parties interested in providing targeted funding solutions to assist companies having difficulties meeting tax obligations.

Businesses and directors looking to restructure debt should consult a legal professional to avoid personal liability for the tax debts of the company. If you would like to discuss any issues you may be facing, contact our team today.