In May 2022, Accountants Daily reported that the ATO was issuing 30 to 40 Director Penalty Notices (DPNs) a day, and warned that the Tax Office was just warming up. Since most small to medium-sized companies rely on their tax advisors to keep them informed of developments that may impact them, we wanted to outline the forms DPNs can take and how you can ensure you don’t receive one.
What are DPNs and should we be worried?
Director Penalty Notices are formal documents notifying company directors of penalties imposed by the ATO for failing to meet specific company tax and superannuation obligations.
Under Division 269 of Schedule 1 of the Tax Administration Act 1953 (Cwth), directors are personally liable for any unpaid amounts of GST, PAYG Withholding and Superannuation Guarantee Charge owed by their company. Additionally, directors are responsible for ensuring all relevant company tax and superannuation liabilities are reported by their applicable due dates.
Once issued, a DPN will outline the amount of the penalty applicable to the director (or directors, in the event the company has more than one and that includes anyone formally named as the company’s secretary) and the lodgement period and tax obligation the penalty relates to. It will also outline the ways by which the penalty notice may be complied with, which vary depending on the type of notice that has been issued.
There are two types of DPNs: Lockdown and Non-Lockdown. The type issued depends on when the lodgement and debt was due and how soon after its due date you reported it to the Tax Office. Lockdown DPNs are the more serious of the two forms and can result in personal bankruptcy.
Non-Lockdown DPNs
Provided a company lodges its relevant returns on time or no more than three months after any applicable due dates, the ATO will issue what is known as a “Non-Lockdown” DPN. Non-Lockdown DPNs enable directors to comply with the penalty notices by either paying the amounts due in full or by appointing a voluntary administrator or a restructuring practitioner or liquidator within 21 days of the DPN being issued.
The 21-day timeline is fixed and cannot be extended in any way and – crucially – begins from the time the Tax Office posts the director penalty notice to you and not from the date you receive it.
The ATO will use the address recorded for you with the Australian Securities & Investments Commission (ASIC) for the purposes of issuing DPNs. For that reason, if you have recently moved – or intend to do so soon – we recommend you update your records with ASIC within 28 days of the change to avoid incurring late fees (which are currently $87 for up to one month late and $362 for over one month late).
If you aren’t proactive in managing your director penalty debt, the Tax Office has the power to issue garnishee notices to your employer, bank, and/or anyone who may owe you money, including trade debtors, requiring that they withhold from you specified amounts and directly remit them to the ATO on your behalf. The Tax Office can also offset any tax credits due to you against the outstanding debt and/or initiate legal recovery proceedings against you.
Director Penalties are also “parallel” in that if/when a debt arises, it applies to every director (again, including company secretaries) associated with the company and not just the “active” or “managing” director alone.
As an example:
Ganesh and Kali are both directors of Mythical Company Pty Ltd, with Kali also being named as the company secretary and responsible for keeping the company’s records with ASIC up-to-date.
During the company’s busiest time of year, Ganesh and Kali get busy fulfilling orders and whilst Kali arranges to lodge the company’s BAS on time for the June 2022 quarter, she forgets to make the associated GST payment of $12,000.
Months go by and the $12,000 GST amount remains unpaid despite Kali receiving reminders from the Tax Office that the payment is overdue. The Tax Office accordingly issues both Ganesh and Kali with a parallel Non-Lockdown Director Penalty of $12,000, as it seeks to recover from both directors the GST amount the company owes.
Ganesh, panicked, personally pays $5,000 to the Tax Office. This payment is recorded by the ATO as a $5,000 contribution to the company’s $12,000 outstanding debt and therefore reduces the company’s liability and Ganesh and Kali’s respective penalties by $5,000, leaving an amount outstanding of $7,000. Kali subsequently remits to the Tax Office the remaining $7,000 owing, bringing the outstanding penalty owed by the company and its directors to $0.
Lockdown Director Penalty Notices
More significant than Non-Lockdown DPNs are Lockdown DPNs, which apply in situations where not only have directors failed to ensure the company is up-to-date with its relevant tax payments, but the company’s lodgement obligations are also overdue by a period of three months or more.
Lockdown penalties are subsequently more severe and even placing the company in administration or liquidation will not cancel the penalty amounts outstanding. They remain a liability of the director/s themselves and if not paid or settled could (in the worst-case scenario) result in personal bankruptcy.
The key is to keep up-to-date
Now that the Tax Office is back to chasing debts it stopped pursuing due to the COVID pandemic, it has never been more important to keep up-to-date with your lodgements and payments, and not just with the Tax Office, but with ASIC too. While we will continue to provide reminders of upcoming taxation obligations and alert you to any relevant changes to legislation, regulations or procedures, it is ultimately your responsibility as a director and taxpayer to ensure you remain compliant.