The ATO has a number of ways to recover debts from companies and directors, one being via a director penalty notice whereby the Tax Office can issue these notices to directors to make them personally liable for two types of company tax debts, namely:
- Pay-As-You-Go Withholding Tax (PAYG)
- Superannuation Guarantee Charge (SGC)
There are two types of Director Penalty Notice (DPN):
- The first type of DPN gives directors 21 days to appoint a Liquidator or Administrator to their company to avoid personal liability.
- The second type, often referred to as a “lockdown DPN” makes the directors immediately liable for the company’s outstanding PAYG and/or SGC.
The ATO can issue a DPN to recover unpaid PAYG withheld from employee wages and unpaid superannuation, which becomes Superannuation Guarantee Charge (SGC) payable to the ATO if not paid each quarter. The DPN may be lodged in conjunction with a garnishee notice to a company’s bank or a statutory demand to commence winding up proceedings.
- A 21-day DPN will be issued to directors of a company if the BAS, IAS or SGC returns have been lodged within three months of their due dates.
- A Lockdown DPN will be issued when outstanding debts relate to a BAS, IAS or SGC return which has not been lodged, or was lodged more than three months after its due date.
If you receive a DPN you first need to determine which type it is, a 21-Day DPN or a Lockdown DPN, and the date it was issued. The notices can be confusing and the 21-day timeframe starts from the date of the letter, so it’s best to check with your solicitor immediately.
If you receive a Lockdown DPN – you and any other directors are personally liable for the debt. If the company cannot pay the debt, the ATO may pursue the directors personally for payment which could lead to their bankruptcy if your company cannot pay the debt, the options for the directors are:
Become personally liable for the debt in anticipation that it will be paid from future trading profits. A payment arrangement should be entered to properly manage the debt. Entering a payment arrangement will not avoid the directors becoming personally liable for the debt after the expiry of 21 days.
Appoint a Liquidator to close- down the business, sell its assets, deal with creditors and investigate its affairs. The directors will avoid becoming personally liable for the debt if a Liquidator is appointed within 21 days of the DPN date.
Appoint an Administrator to give the company breathing space to put a proposal to creditors to allow it to continue trading. The directors will avoid becoming personally liable for the debt if an Administrator is appointed within 21 days of the DPN date.
As well as encouraging business owners to pay their tax debts, the DPN regime is designed to get business owners to lodge their returns on time.
New directors become personally liable for outstanding PAYG or SGC debts 30 days after their commencement as a director of a company. Accordingly, conducting due diligence into a company’s liabilities is important before accepting a directorship.
If you intend to resign as a director you could still be personally liable for the debt.