With a recent uptick in the number of director penalty notices (DPNs) being issued by the Australian Taxation Office (ATO), we turned our minds to what information can help you navigate the latest ATO approach.
Here, Michael Buscema, Aptum’s practice lead for tax disputes, has answered some frequently asked questions we receive from both company directors and agents (accountants) about DPNs.
For 11 years prior to joining Aptum, Michael worked for the ATO and Commonwealth Treasury, holding a range of senior positions including Acting Assistant Commissioner of the ATO. In recent years Michael has been instrumental in steering the ATO’s post COVID-19 debt recovery strategy, giving him unique insights into the ATO’s latest approach.
First, the types of taxes that are mostly owed in the community are Pay As You Go (PAYG) withholding, Goods and Services Tax (GST), and Superannuation Guarantee Charge (SGC). DPNs specifically apply to these three tax types and are an effective way for the ATO to address these debts.
Second, the intent behind the director penalty regime is to encourage companies to address their debts earlier. During the COVID-19 pandemic, companies were allowed to accumulate tax debt while the ATO took a back seat. As a result, many companies emerged from the pandemic with unmanageable debt levels.
By issuing more DPNs, the ATO aims to prompt directors to confront these debts before they escalate to unmanageable levels.
2. Is the ATO going to keep issuing this many DPNs?
Yes, but probably not in the way you expect.
Traditionally, the ATO has issued DPNs after attempting to contact the company for payment. However, during COVID-19, many entities accumulated debt without immediate consequences, leading to situations where the money was no longer available when the ATO sought to collect.
Moving forward, the ATO is likely to issue DPNs earlier, while companies still have the funds to meet their obligations. This allows directors to make timely decisions about whether to continue trading or consider insolvency processes.
3. What are the warning signs before a director receives a DPN?
Directors should be vigilant for the following warning signs:
Firmer Action Warning Letter: The ATO will typically send a firmer action warning letter to a company before issuing a DPN, unless the matter is particularly egregious.
Director Penalty Awareness Letter: While these have been sent occasionally, there is no guarantee they will continue. Directors should not rely on receiving one before a DPN is issued.
Shorter Timeframes: There is now likely to be less time between incurring a debt and receiving a DPN. If a company lodges a Business Activity Statement (BAS) or Superannuation Guarantee Charge (SGC) statement and does not pay, a DPN could be issued within a month. Directors should take proactive steps to manage these debts, either by making payment or by seeking an arrangement to avoid receiving a DPN.
4. What can directors do once they receive a DPN?
Once a DPN is received, your options are often limited.
When you receive a DPN, you have 21 days to take action to avoid personal liability, which can include by either paying the debt, taking steps to place the company into administration or liquidation, appointing a small business restructuring practitioner, or otherwise proving a defence.
If the 21-day period of the DPN has expired, consider whether a defence applies.
Defences may apply in situations where:
the director was not involved in managing the company due to illness or other valid reasons, or;
where all reasonable steps were taken to ensure the company complied with its obligations.
In such cases, seeking advice from a firm like Aptum is an appropriate next step.
5. I was never a director of the company. Can the ATO recover a director penalty from me?
Directors must be registered with the Australian Securities and Investments Commission (ASIC). If the ATO sends a DPN based on ASIC records, and you believe you were not a director, check your registration status with ASIC.
If you were registered without your knowledge, you may need to update the records to reflect this, which could potentially remove your liability.
In cases of economic abuse, where individuals are signed up as directors without their knowledge or under duress, it can be challenging to resolve. In these circumstances, if you were never involved in the company, then Aptum or an appropriate tax clinic may be able to assist you in running a defence.
6. What are my options if other directors have assumed financial responsibility for the company?
We often see cases where directors have arrangements with co-directors regarding who will manage the company’s financial affairs or cover any shortfalls.
If you receive a DPN and you have an arrangement with co-directors for them to manage the company’s affairs or pay any shortfalls, then Aptum can assist you in managing the proceedings with the ATO. Additionally, we can help you pursue actions against co-directors if they fail to fulfill their financial responsibilities.
7. What do agents need to watch out for with regard to DPNs?
Agents play a crucial role in managing a company’s affairs.
If a company is not paying its lodgments on time – particularly BAS lodgments – or is receiving correspondence from the ATO about outstanding debts, agents need to ensure that directors are informed.
Often, a director may not be aware of the company’s financial position or the position this puts them in personally until they receive a DPN, which can lead to disputes and potential negligence claims against the agent.
Therefore, agents must stay on top of ATO communications and keep directors informed about the company’s financial status to avoid any issues when a DPN is issued.
If you have received a director penalty notice and the 21-day notice period has expired, contact Aptum for advice as to your options.
Keep Learning
Now that you have an understanding of director penalty notices, here are a few more articles to deepen your understanding of tax disputes:
