A key misunderstanding among many directors is that the company structure they operate within protects them from being personally liable for any of their company’s debts. And it’s not until they receive a Director Penalty Notice that they realise this isn’t the case. If this happens to one of your clients, then swift action is needed.
What is it?
A Director Penalty Notice (DPN) is a notice the Australian Taxation Office (ATO) sends to a director to make that director liable for two types of tax-related debts, namely Pay As You Go (PAYG) and the superannuation guarantee charge (SGC). It is basically a penalty against a director for non-payment (and non-reporting) of these debts and allows the ATO to collect unpaid liabilities directly from them – in other words, they are personally liable for them.
What is the objective of a DPN?
Jirsch Sutherland Partner Chris Baskerville says the aim of a DPN is to ensure directors comply with their company’s taxation and superannuation obligations. “DPNs are not only a means to protect employee entitlements – and deter directors from using the monies for other means – but they are a tool to defeat phoenix activity,” he says. “This is where assets are transferred into a new company to avoid paying creditors, tax or employee entitlements.”
What can you do if your client receives a DPN?
Chris says there are two scenarios if your client receives a DPN depending on whether they have lodged their PAYG returns and SGC within three months of their due dates.
“If they have reported by the due date, yet they remain unpaid, then the client will likely receive a DPN at their last known residential address as per ASIC’s records,” Chris says. “From this time, your client has 21 days from the date of the DPN to exercise one of three options: either pay the liabilities in full, put the company into voluntary administration, or liquidate the company.”
However, if the PAYG and SGC have not been lodged within three-months of the deadline date and the liabilities remain unpaid, the client will receive a DPN and be automatically personally liable for those debts. This scenario also means that the director cannot simply place their company into administration or liquidation and discharge their personal liability.
Chris says to avoid becoming personally liable for a debt, the director should ensure they have lodged all Business Activity Statement returns and SGC forms within three months of the respective lodgement due dates.
“If this has been done then at least the director has 21 days to avoid personal liability if a DPN is sent,” he says.
There are some defences that may be acceptable but have to be proven within 60 days. They include: illness, a proven inability to manage the company, that all reasonable steps to pay the debt or to liquidate the company were taken, or that all reasonable steps to appoint an administrator were taken.
What are the implications?
Directors need to be aware that they have a significant risk of personal liability if they don’t pay their PAYG and SGC entitlements. “The onus on directors is high,” Chris says. “Especially with the short time frames to mount a defence or to pay the notice. If your client has received a DPN, you need to act fast.”