Earlier in the year, we released a piece highlighting the dangers of Employer Obligations. This piece noted the risks of not meeting your Employer Obligations in an M&A scenario. These risks were excellently illustrated in a recent Australian Financial Review article, which claims the Directors of the company were subject to Director Penalty Notices (DPN) for unpaid Superannuation Guarantee. Despite the media around the increases in DPNs issued in recent months, the company had been placed into voluntary administration.
This move by the ATO is a timely reminder that Directors (past and present) have a vested interest to ensure their company’s tax obligations have been met, and further underlines it’s never been more important for Directors to undertake a review of the company’s liabilities to ensure there are no hidden shortfalls.
What are Director Penalty Notices?
Division 269 of the Taxation Administration Act 1953 gives the Commissioner the power to collect certain tax debts (Superannuation Guarantee, PAYG, GST, Wine Equalisation Tax, and Luxury Car Tax) incurred by a company, directly from the Directors by issuing a DPN. The DPN can be issued to current or prior Directors and requires the Director to take certain actions or become personally liable for the company’s tax debts.
How will a DPN affect you?
If the company is unable to settle the tax debt, the Director will be personally liable and the ATO can take measures such as issuing a garnishee or pursuing bankruptcy to collect the outstanding debt. Directors are automatically prohibited from acting as a Director of any company while bankrupt.
How is a DPN usually issued?
A DPN is issued to a Director at their individual contact address recorded with ASIC. Please note that this is not usually the company’s registered office. They then have 21 days to respond to a DPN before being able to avoid personal liability for the outstanding debt.
Key risk areas and how to minimise them
- Recently appointed Directors of a company can be held personally liable for historical tax debts such as superannuation, PAYG or GST if they remain unpaid and unreported within 3 months after the date of appointment. However, this liability will be waived for incoming Directors if the unpaid tax debts are settled and reported to the ATO within 30 days of starting their appointment.
- Former Directors can be pursued for any unpaid superannuation obligations, which were due up to the date of their resignation at the company.
- The ATO can also issue a DPN to current and former Directors after a company has gone into voluntary administration or is in liquidation.
We’ve seen trends pointing to shortfalls detected in about 70 per cent of businesses across all sectors and sizes. If we extrapolate this risk across multiple scenarios such as insolvency or M&A, we wonder where the risk for the Director ends.
For example, if a Superannuation Guarantee shortfall is detected years after the cessation of the business and the company is no longer trading, does that mean the Director will likely bear the brunt of the risk and liability?
What are my options
If you receive a DPN, you have limited options around how you can avoid personal liability. Within 21 days you must either:
- Pay the debt or enter into a repayment plan to pay the debt; or
- Appoint a voluntary administrator, liquidator or small business restructuring practitioner. The later option has strict eligibility requirements and is only available to very small businesses.
A lockdown DPN can be issued by the ATO where a company has not lodged its BAS or SGC statements. In this case, the Director is immediately liable for the tax if they receive a lockdown DPN. The Director’s only option to mitigate personal liability is for the tax debt to be repaid by the company. You should ensure the company complies with its reporting obligations with the ATO at all times, regardless of whether the company has sufficient funds to remit the tax debt, to avoid the risk of a lockdown DPN.
How we can help
To ensure you minimise your risks and liabilities as a Director, we encourage you to get in touch to consider your Superannuation, PAYG, GST, Wine Equalisation Tax, and Luxury Car Taxes – both from a current and historics stand-point. Contact our team of tax experts today if you have any questions about the risk of DPNs and insolvency.