There is no worse feeling then meeting directors and telling them they have a very large personal liability they never knew about. What follows are question like: “do I lose my home?”, “will I go bankrupt? I have children”, and so on. Unfortunately, I do this too often. Most directors (and professionals) in Australia know very little about director penalty notices (DPNs) and how they operate. Thousands of directors are currently operating their businesses through a corporate structure with the misbelief they are personally protected by way of limited liability – meaning company debts remain with the company.
The director penalty notice legislation has been around for years and has often been attacked as discouraging entrepreneurship and defeating the century old doctrine of corporate protection. Unfortunately, this legislation has been set in stone in Australia and is here to stay. It is therefore imperative for directors to be aware and take the necessary action to avoid personal liability.We hope this article demystifies the mysterious “DPN”
What is a director penalty notice?
A director penalty notice in essence is a mechanism that allows the Australian Taxation Office to collect unpaid Pay-As-You-Go (PAYG) tax and superannuation liabilities of companies directly from directors, meaning the directors are personally liable for these liabilities.
Why is the director penalty notice so significant?
Because it allows the Australian Taxation Office to easily pierce the corporate veil and pursue directors personally for PAYG tax and superannuation owing by a company. This means directors are no longer protected through the corporate structure.
Under what legislation is director penalty notices issued?
Section 222AOE of the Income Tax Assessment Act 1936 is the main legislative act that allows the tax office to collect amounts owed personally from directors.
How do I know if I am subject to a director penalty notice and what can I do about it?
These are probably the most common questiond in regards to the DPN. To simplify it, consider the following simple question.
Have you lodged your PAYG returns and/or Superannuation Guarantee Charge within three months of the due dates of these documents?
If your answer is yes, then you fall under Scenario 1.
If your answer is no, then you fall under Scenario 2
If you have lodged your PAYG returns and Superannuation Guarantee Charge statement within three months of these documents’ due dates and these liabilities remain unpaid, then you would need to receive a director penalty notice at your personal address recorded with the Australian Securities and Investments Commission (ASIC) for the company. In some instances, the registered tax agent for the company may also receive the director penalty notice on behalf of the director. This does not mean the tax agent is responsible for the liability but merely responsible for forwarding the DPN to the directors.
It is therefore very important that directors maintain the ASIC records with the most recent addresses so that important documents, such as the director penalty notice, are sent to the correct address.
Once you receive the director penalty notice, you have 21 days from the date of the notice to exercise one of three options to avoid personal liabilities. The options are:
- Pay the liabilities;
- Place the company into voluntary administration; or
- Liquidate the company
If you exercise one of the above options within 21 days, you avoid personal liability and the debt remains with the company.
If you fall under scenario 2, it means you have not lodged your PAYG returns and/or Superannuation Guarantee Charge statement within three months of these documents’ due dates and these liabilities remain unpaid. Unfortunately, under these circumstances you are automatically subject to a director penalty notice and may have a personal liability.
Once the director penalty notice is issued under this scenario, you are automatically liable and you are not able to discharge your personal liability by exercising one of the three listed options in scenario 1.
What can I do to avoid personal liability?
Apart from the obvious answer of paying the liabilities, the simple solution is to make sure you lodge your PAYG tax returns and Superannuation Guarantee Charge forms with the tax office within three months of their lodgement date. At least then you will have the peace of mind that you will receive the director penalty notice in the mail and you will have 21 days to take action and avoid personal liability.
Does the tax office always issue a director penalty notice and do I automatically go bankrupt once it is issued?
The short answer is no, however, there are a number of factors at play.
The issuing of a director penalty notice is a discretionary power of the ATO. I have seen many instances where despite there being a possible personal liability, a director penalty notice is never ultimately issued or pursued against the director. There is no rule or formula that encapsulates the tax office’s discretion but from what I have seen, a DPN is more frequently issued where the company and its directors have had a history of not paying tax. The quantum of the tax, the compliance history of the company and the age of the tax debt are also important.
Also, thedirectors’ personal position is an important factor that is considered when determining if the DPN is to be pursued to its full extent. Ultimately, the tax office is also a commercial entity and needs to make sensible commercial decisions in pursuing revenue. One of these decisions is not to pursue fruitless claims against directors with no assets as all it will achieve is extra costs.
Unfortunately, there is no definitive answer to this question. Directors are encouraged act quickly and seek professional advice tailored to their circumstances.