Director Penalty Notices: Tips and traps

It is well recognised that over the Covid-19 period, many businesses did not meet their tax obligations. Total collectible debt rose from $26.4 billion in December 2019 to $52.4 billion in December 2023. Of this, approximately $34.1 billion, being 65 per cent of all collectible tax debt, is owed by small businesses.

It is also well recognised that the ATO is now taking a strong stance on recovering that debt.  The ATO Corporate Plan for 2023-2024 specifically included as a Key Focus area:

Take decisive and swift action with those who are choosing not to engage and clients who purposefully avoid payment obligations. Recover high-value and aged debts and require timely payment of employer obligations that include or could lead to unpaid superannuation.

ATO’s key deliverables include expedited stronger recovery action and firmer action consequences, especially where clients do not engage. While this stronger action applies across the board to all tax debt, there is a particular emphasis on unpaid superannuation guarantee contributions, as the shortfall in these payments can directly impact employees.

Currently, recovery mechanisms being employed by the ATO include enforcement of strict compliance with payment plans (even a one day delay triggers default), issuing Court proceedings on individual and partnership debt, and issuing Director Penalty Notices (DPNs). More than 30,000 DPNs were issued in the first quarter of 2024, and they have continued at a rapid rate.

We expect that the next stage of enforcement action will follow, with more frequent garnishee notices and legal proceedings to come.

It is important that DPNs be addressed promptly. Failure to do so may result in personal liability for directors of company tax debt. Below is a list of key tips in dealing with DPNs.

Act quickly

Directors have 21 days to respond to the DPN, calculated from the date that the notice was posted (the issue date of the notice). Postal time means that a director has less than 21 days to both obtain advice on strategy and, where appropriate, implement the next step. This can be a tight timeframe, particularly if the facts are complicated or, as is commonly the case, the debt cannot be promptly paid in full.

If you are (or were) a director of a company that has unpaid tax debt, even if that company has already gone into administration or liquidation, it is important to check your letterbox so that valuable days are not lost. We can assist you in reviewing the DPN and putting in place a strategy.

This leads to the second point.

Make sure that the ASIC database is accurate

The ATO will:

• use ASIC’s records to determine when a person was a director of the relevant company for the purpose of calculating director penalties; and
• post DPNs to the address as recorded on the ASIC database.

The responsibility for ensuring that the ASIC database is correct lies on the director; the Courts have confirmed that no extensions of time or reduction in the debt will apply if the director did not respond because the address recorded by ASIC was outdated.^[1]

Make sure that on the ASIC database:

• your address is correct;
• the dates for your directorship are correct; and
• if you resigned as a director, that resignation is recorded on the ASIC register (with correct dates).

When resigning as a director, the paperwork should be lodged promptly. If ASIC is not notified within 28 days of your resignation, the effective resignation date will be the lodgment date for the ASIC notification. This can lead to a larger potential ‘exposure period’ for DPN debts than may otherwise apply.

Check the accuracy of the DPN

Given the high number of DPNs being issued, it is not surprising that some contain errors. This can include, for example:

• incorrectly stating that ATO lodgments were not submitted within the necessary timeframes;
• claiming tax debt, such as superannuation guarantee charges, for periods after the relevant employees were terminated in the company’s liquidation;
• claiming director penalties for periods where the company was put into administration or liquidation before the due day for reporting and payment of relevant tax obligations, meaning there is no director’s penalty;
• claiming interest and penalties that had previously been waived by agreement with the ATO (in circumstances where the taxpayer had complied with their obligations under the agreement); and
• incorrect calculations.

Make sure that the amounts and dates set out in the DPN are accurate. It is important that you understand the company’s tax position and lodgment status.

We can work with you through the detail of the DPN and assist you in determining whether it is accurate and enforceable.

Know your options

Non-Lockdown DPNs

There are two types of DPNs: ‘lockdown’ and ‘non-lockdown’ DPNs. It is important to understand the difference and determine which applies, as it will have an impact on the options available to the director.

‘Non-lockdown’ DPNs apply where the lodgments have been submitted within the relevant timeframe, but the tax has not been paid. Under ‘non-lockdown’ DPNs, the director has 21 days to take certain steps (see below), otherwise they will remain personally liable for the tax debt.

The relevant timeframes are:

For non-lockdown DPNs, directors can remove personal liability for the debts by taking one of the following steps within the 21-day period:

• have the company pay the debt;
• appoint a voluntary administrator;
• appoint a small business restructuring practitioner; or
• appoint a liquidator.

Importantly, entering an ATO payment arrangement within the 21-day period will not remove the director’s personal liability for the debt. Once the 21-day period lapses (generally, during the payment plan), personal liability will remain and then likely be acted upon by the ATO if the payment plan defaults.

Lockdown DPNs

‘Lockdown’ DPNs are issued when the lodgments have not been submitted within the relevant timeframes. There is no ability for the director to remove personal liability, unless they have a defence (see next point).

Do you have a defence?

It is worth knowing whether a defence may apply. Importantly, the defence(s) must apply for the entire period of the DPN obligation in order to avoid the personal liability.

The DPN is incorrect

Including for the reasons set out above.

You were not a director during the relevant period

If you resign, you will still remain liable for director penalties for liabilities of the company that either:

• arose during your period as a director (ie before your resignation), including if the debts arose in a reporting period that started while you were a director; or
• arose after your resignation, if:
  • PAYGW and GST (including LCT and WET): the first withholding event in the reporting period occurred before your resignation; or
  • SGC: the charge accrued before your resignation.

However, you will not be liable for ATO amounts which arose if you were not a director in the relevant period.

You did not take part (and it would have been unreasonable to expect you to take part) in the management of the company during the relevant period because of illness or another acceptable reason

It is important to note that the criteria for this defence is strict. The Courts have held that a high standard of care, skill and diligence is expected of directors in fulfilling their roles; it is expected that every director will be involved in management of the company in accordance with their directors’ duties.^[2]

A failure to understand company matters or directors’ obligations, a belief that you are not required to participate in the company, and/or reliance on other directors/advisors will generally not be sufficient for a defence.

You took all reasonable steps to ensure that the company paid the outstanding amount, or that an administrator, small business restructuring practitioner, or liquidator was appointed

Again, the standard for this defence is high. The director must take all reasonable steps to address each option, either by bringing it about or by demonstrating that there were no such steps that could have been taken.^[3]

For unpaid superannuation guarantee amounts, the Company treated the relevant legislation as applying in way that, reasonably argued, was in line with the law and took care in acting in accordance with that interpretation

This refers to a standard where the taxpayer takes a position about how the law is applied based on relevant authorities such as legislation, case law and ATO rulings, which has reasonable grounds for being in line with the law.