News & Insights

The Australian Tax Office (ATO) has recently ramped up the number of Director Penalty Notices (DPNs) being issued to directors in an attempt to reduce outstanding company liabilities, which currently totals more than $2.5 billion. In the 2022-23 financial year, the ATO issued over 20,000 DPNs to directors, highlighting their sharpened focus on reducing company debts.

What is the Director Penalty Regime?

Company directors are responsible for ensuring a company fulfils its obligations to pay its pay as you go withholding tax (PAYGW), goods and services tax (GST) and super guarantee charge (SGC) on time and in full. When companies fail to meet these obligations, company directors become personally liable for a penalty equal to any outstanding and overdue amounts.

How is this liability enforced?

If a company fails to fulfil its obligations, the ATO may issue DPNs to the company’s directors. As its name suggests, the DPN confirms that a penalty has been imposed on the director personally in an amount equal to the unpaid taxes and superannuation.

The ATO may issue a non-lockdown DPN or a lockdown DPN.

Non-Lockdown DPN

If a company has lodged its business activity statements (BAS), instalment activity statements (IAS) and/or SGC statements within 3 months of the lodgement due date, but there are PAYGW, GST or SGC amounts outstanding, the ATO will issue a non-lockdown DPN.

Once a non-lockdown DPN has been issued, directors have 21 days to:

• pay the penalty amounts in full or negotiate a payment plan with the ATO;
• appoint a voluntary administrator to the company;
• appoint a small business restructuring practitioner; or
• appoint a liquidator.

If one of the above is done, the penalty is “remitted” (i.e. cancelled) as a personal liability.

However, if a director fails to respond to the DPN within 21 days in one of the ways required for remission, the director penalty locks down permanently and the ATO can commence recovery proceedings.  To recover the penalty the ATO may:

• issue garnishee notices;
• offset any of the director’s personal tax credits against the penalty amounts; or
• initiate legal proceedings against the director.

Lockdown DPN

If a company failed to lodge its BAS, IAS and/or SGC statements within 3 months of the lodgement due date, the ATO will issue a lockdown DPN.

Unlike a non-lockdown DPN, the only avenue for directors who have received a lockdown DPN to remit the penalty is to pay the penalty amounts in full to the ATO. For the avoidance of doubt, a director is not released from this personal liability by placing the company in voluntary administration or liquidation; the lockdown DPN will continue to remain active until the debt owed is paid in full.

What if I’m a new director?

New directors are still liable for director penalties on taxes due before their appointment unless within 30 days of their appointment, they ensure the company:

• pays its debts in full;
• appoints an administrator under s 436A, 436B or 436C of the Corporations Act;
• appoints a small business restructuring practitioner under s 453B of the Corporations Act; or
• begins to be wound up.

Additionally, resigning within 30 days of their appointment does not absolve new directors of these liabilities.

Defences to a Director Penalty Notice

A director, who has received a DPN, is not liable for director penalties if that director can establish one of three defences: illness (or justifiable non-participation in management), all reasonable steps, or, in the case of SGC and GST Act liabilities, that the company took a ‘reasonably arguable position’ in applying the relevant legislation. They can be understood as follows:

1. Illness: The director did not take part, and it would have been unreasonable to expect the director would take part, in the management of the company during the relevant period the liabilities accrued due to illness or another acceptable reason; or
2. All reasonable steps: The director took all reasonable steps to ensure the Company:

• paid its debts in full;
• appointed an administrator;
• appointed a small business restructuring practitioner; or
• began to be wound up.

3. Reasonably arguable position: This defence is available for SGC liabilities and net assessed amounts of GST when a DPN results from the company treating the Superannuation Guarantee (Administration) Act 1992 or A New Tax System (Goods and Services Tax) Act 1999 as applying in a particular way that was reasonably arguable. The general test is whether, having regard to the relevant authorities, what is argued for is about as likely to be correct as incorrect.

The courts have determined that a defence must cover the entire period of the director’s obligation to ensure the company’s liabilities were paid, including the period of the breach, due date, and expiry of the notice. Furthermore, the courts have established a defence is invalid if the director relied on others to meet the obligations or was not involved in the company’s management Such conduct would constitute a breach of duty.

How to submit a defence

In Court proceedings commenced by the Commissioner to recover a director penalty, a defence

may be raised and proven by the director in response to the claim.

If the Commissioner elects to collect the penalty through other means (such as through the issue of a “garnishee notice”), details of the defence must be given to the ATO within 60 days by submitting a written application to the Commissioner. The application must clearly outline the defence, all necessary information and supporting documentation.

If you need advice regarding issues with company liabilities or a DPN you have received, please contact our Corporate Team. Macpherson Kelley is here to help.