What is a DPN?
A director penalty notice (DPN) is essentially a means for the Australian Taxation Office (ATO) to pierce the corporate veil and make directors liable, in certain circumstances, for a company’s outstanding pay as you go withholding (PAYGW), GST and superannuation obligations.
DPNs are commonly issued by the ATO in an insolvency (or pre-insolvency) scenario, and have significant implications for directors.
Importantly, they can be issued to any person who was a director at the time the relevant PAYGW, GST and/or superannuation payments were not made in time, or a new director appointed after that time who does not cause the company to meet its outstanding obligations or appoint an insolvency practitioner.
Therefore, you cannot avoid personal liability under a DPN simply by resigning.
It is not uncommon to see the ATO issue DPNs to directors five or more years after they have ceased to hold office.
Types of DPNs
There are two types of DPNs:
- Non-lockdown DPNs, which will be issued by the ATO when a company’s debts are unpaid, but have been reported within three months of the due date.
- Lockdown DPNs, which will be issued by the ATO when a company’s debts are unpaid andhave not been reported within the timeframes outlined above.
Time to comply
If the ATO has issued a non-lockdown DPN, a director has 21 days to avoid personal liability for the debt. They can do so by either:
- paying the debt;
- appointing an administrator;
- appointing a small business restructuring practitioner; or
- winding up the company.
On the other hand, the only way to avoid personal liability for debts referred to in a lockdown DPN is to cause the company to make payment within the 21 day period.
Calculation of time
The position under section 269-25(4) of Schedule 1 to the Taxation Administration Act 1953 (Cth) (Act) is that a DPN is taken to be issued when the ATO posts it to a director.
The date of receipt is irrelevant for the purpose of calculating the time for compliance.
The recipient’s address, under section 269-50 of the Act, can be taken by the ATO to be the address for a person listed on ASIC’s register.
If you are a director, it is therefore critical to ensure your address details are up to date, and that you are regularly checking your post if the company is having difficulties meeting its tax obligations, or it previously was at a time you were appointed as a director even if you have since ceased to be a director.
Missing the compliance period
If you miss the 21 day compliance period due to inadvertence, the outstanding tax debt is regarded as being personally owed by you, and the ATO is entitled to (and usually does) take immediate enforcement action.
Your only option will then be to seek to defend the matter on one of the limited grounds specified in the Act:
- You did not take part (and it would have been unreasonable to expect you to take part) in the management of the company during the relevant period because of illness or another acceptable reason.
- You took all reasonable steps to ensure that the company paid the outstanding amount, or that an administrator, small business restructuring practitioner, or liquidator was appointed.
- For unpaid superannuation guarantee amounts only, the company treated the relevant legislation as applying in way that, reasonably argued, was in line with the law and took care in acting in accordance with that interpretation.
The standard for each of these defences is high, and the courts have emphasised that strict duties of care, skill and diligence are expected to be upheld by directors in fulfilling their responsibilities to the company. It is not sufficient to simply delegate responsibility for the company’s tax compliance to external advisers.
Takeaways
Not only do you need to ensure your address details are up to date, but if you do in fact receive a DPN, you need to act quickly.
In doing so, you can seek to engage with the ATO at an early stage with a view to having the outstanding amounts remitted, or at least entering into a compliant payment plan that could avert the commencement of debt recovery proceedings against you.
Our team
At K2 Law, we have a dedicated team with comprehensive expertise in all restructuring and insolvency matters. We regularly advise directors on DPNs and seek to reach negotiated outcomes on their behalf with the ATO.
If you would like to discuss your options in relation to a DPN you have received, or expect may be issued to you, please get in touch with Alyce Corbutt or Matthew Kumnick.
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