Director Penalty Notices catching former directors “unawares”

There’ll be an increase in bankruptcies “without a shadow of a doubt”

Director Penalty Notices. Three words that have been sending chills up many a director’s spine over the past couple of years. But did you know that former company directors – even of long-ago liquidated businesses – are being caught in the DPN net?

I have seen a number of older matters rise from the ashes, particularly with the massive increase in DPNs, warnings of possible DPNS, and now garnishee notices, being issued by the ATO as it continues to intensify its debt collection activities. Plus, we’re now also seeing greater pressure being applied by second-tier financial institutions. And without a shadow of a doubt this will result in an increase in bankruptcies.

The deregistration of a company doesn’t even shield its directors from DPNs. You might be lulled into a false sense of security if you are the former director of a company, but tax and superannuation debt, not to mention personal guarantees, have a habit of catching up to directors of previously wound-up businesses.

Directors are often required to sign personal guarantees, which renders them personally liable for any debts that the company cannot pay. DPNs and personal guarantees are just a way of business life now, but directors need to be fully aware of the implications and risks associated with them. And when establishing a business, asset structuring and protection mechanisms need to be a focus, so you mitigate the chance of being caught years down the track.

What is a Director Penalty Notice?

A DPN is a tool employed by the ATO to hold company directors personally accountable for unpaid tax debts. DPNs come in two types:

1. Traditional 21-day DPNs (Non-Lockdown DPNs); and
2. Lockdown DPNs

Non-lockdown DPNs provide a 21-day window for compliance (and it’s important to note that the countdown begins upon the DPN’s posting), while lockdown DPNs make directors instantly liable.

Lockdown DPNs arise when a company has failed to lodge its BAS, IAS and/or SGC statements within three (3) months of their due date for lodgement. In these circumstances, the liability automatically attaches to the director.

Not complying with a DPN has severe consequences. Directors become personally liable for the tax / superannuation debt, face legal action by the ATO, may receive garnishee orders (a legal process that instructs a third party to deduct payments directly from a debtor’s wage or bank account), and even risk bankruptcy.

If you do receive a DPN, then it’s critical to swiftly seek advice from an insolvency or legal specialist. In certain circumstances, directors can avoid personal liability by fulfilling DPN requirements and exploring available defences. These include:

1. Although the illness must have been for the entire time a director was unable to manage the company.
2. Reasonable steps. Directors must show they tried to:

• Pay the tax debt
• Put the company into administration
• Engage a small business restructuring practitioner
• Appoint a liquidator

Seven tips to help directors manage ATO and DPN risks

1. Lodge on time (or at least three months after the lodgement due date)
2. Maintain current address details with ASIC
3. Open and read ALL ATO correspondence – and seek help if you don’t understand anything
4. Engage with the ATO. Do not ignore them
5. Watch for solvency warning signs
6. Communicate regularly and meaningfully with your advisers
7. Seek advice if you suspect your business is experiencing financial difficulty

Must-dos for new directors

Before becoming a company director, it’s important to check if the company has any unpaid or unreported PAYG, GST and superannuation liabilities. You can avoid becoming liable for director penalties that were due before your appointment if within 30 days of your appointment the company does one of the following:

• Pays its debts in full for PAYG, net GST from April 1, 2020, and superannuation from April 1, 2012.
• Appoints an administrator.
• Appoints a small business restructuring practitioner.
• Goes into liquidation.

Note that even if you resign as a director within the 30-day period, you will still be liable for these unpaid liabilities. DPN liabilities are joint and several. If there is more than one director, the ATO may choose to pursue one director rather than another for the full amount.

If you resign as a director, you remain liable for director penalties for liabilities of the company that were due before the date of your resignation.

Our team across Australia has vast experience with DPNs and can help you navigate the maze to determine the best solution. Please don’t hesitate to contact us for an obligation free consultation.

Stewart Free
Partner
Registered Bankruptcy Trustee | Registered Liquidator
Jirsch Sutherland
1300 547 724
enquiries@jirschsutherland.com.au