ATO authority to issue Director Penalty Notice

Matthew Fairthorne

20 July 2022

Recent commentary within the accounting industry and the broader community has focused on the increase in debt enforcement action by the Australian Taxation Office (ATO) with respect to company’s outstanding taxation liabilities, in particular issues surrounding the ATO’s use of a Director Penalty Notice (DPN).

The Tax Administration Act 1953 empowers the ATO to issue a DPN which ultimately seeks to impose personal liability on a company’s director in respect to certain tax debts owing by the company.

In the case of company’s PAYG and GST, where the debt was not reported to the ATO, i.e. BAS or IAS lodged, within three months of the relevant statutory due date then the penalty amount will be ‘locked down’ and the only way the director can avoid personal director penalties is to cause the company to pay the outstanding debt.

For example: a June quarter BAS with a due date of 21 July 2022 must be lodged on or before 21 October 2022. Where it is not, the penalty would be locked down and the director can no longer avoid personal director penalties.

To illustrate this point, let’s consider Sally, who is the sole director of XYZ Pty Ltd. XYZ has outstanding GST and PAYG of $100,000 which was incurred for the period 1 January 2020 to 31 March 2020. The BAS for this period was due to be lodged with the ATO on 28 April 2020, but it was actually lodged on 1 September 2020. The ATO issues a DPN to Sally seeking to impose personal director penalties equal to $100,000. As the BAS was lodged more than three months after its due date, the only way for Sally to escape personal director penalties is to cause the Company to pay its outstanding ATO debt of $100,000, if it cannot pay then she is now personally liable for penalties to the ATO of $100,000.

Should a company have outstanding Superannuation Guarantee Charge (SGC), the debt must be lodged with the ATO by the due date for any SGC statement in order to avoid ‘lock down’ of the personal director penalties.

Regardless of whether the company’s BAS or SGC Statement have been lodged on time, the ATO also has the authority to issue a DPN to seek to impose personal liability on a director for a penalty amount equal to the quantum of a company’s unpaid:

PAYG withholding
GST
SGC

Importantly, should the company have more than one director, personal liability will extend to all directors of the company, and each will be personally liable for the total penalty amount. Resignation as a director will fail to mitigate a director’s personal exposure in respect to the period of their appointment.

Upon receipt of a DPN (where the relevant liability has been reported within the above mentioned deadline), a director has 21 days to implement one of the following options in order to avoid ‘lockdown’ of personal director penalties:

Cause the company to pay the debt in full
Appointment of a Voluntary Administrator
Appointment of a Liquidator, or
Appointment of a Small Business Restructure Practitioner.

It is also noted that once a DPN has been issued, negotiating a payment plan is no longer an option to avoid personal director penalties ‘lockdown’.

To revisit our earlier example of XYZ Pty Ltd, lets take the same situation but say the company lodged its March 2020 quarter BAS on 1 July 2020 instead of 1 September 2020. Because the BAS was lodged within 3 months of its due date, when Sally receives a DPN from the ATO she now has 21 days to implement one of the above mentioned options available to be able to avoid director penalties.

As such, even if the company is having financial difficulties, it is critical that directors:

Ensure they are causing the company to comply with its PAYG, GST and SGC lodgement obligations, even if they cannot pay the associated tax debt, and
Seek immediate professional advice upon receipt of a DPN (or at an earlier stage in the event the Company has debts owing to the ATO that it cannot meet) to understand the options available to them.

If you have recently received a DPN or you wish to obtain further information about DPNs or the options available to you as a director, our Corporate Recovery team are available to discuss your options.