Australian Tax Office Crackdown on Director Penalty Notices

The Australian Taxation Office’s recovery actions are back post-pandemic with a vengeance. According to recent statistics, the ATO has intensifies its use of director penalty notices, issuing 26,702 to company directors in the 2023-24 financial year at an estimated worth of $4 billion. In this article, Law Clerk, James Wright and Partner, Lachlan Boyle, explore the ATO’s heightened focus on director penalty notices to claw back unpaid company liabilities.

Director Penalty Notices

It is no secret that directors have statutory obligations to ensure their company meets its Pay As You Go (PAYG) withholding, Superannuation Guarantee Charge (SGC) amounts or Goods and Services Tax (GST) obligations.

However, if the company fails to meet its taxation obligations, or meaningfully engage with the ATO in relation to any liabilities, the ATO has been a range of enforcement actions at its disposal to claw back outstanding debts, including exposing company directors to personal liability through director penalty notices.

A director penalty notice (DPN) is a formal notice issued by the ATO to company directors when their company has defaulted on their tax obligations. It represents a last resort attempt for the ATO to force the Company’s hand in light of non-compliance.

There are two types of DPNs, namely:

Non-Lockdown DPNs

Non Lockdown DPN’s are issued to a company director where the company has lodged its BAS, IAS or SGC statements, but the debt remains unpaid.

Importantly, Non-lockdown DPNs provide company directors with 21 days of the date of the DPN to either:

(a)        satisfy the debt, in full, or negotiate a payment plan with the ATO;

(b)        appoint an administrator or small business restructuring practitioner;

(c)        wind up the company; or

(d)        attempt the defend the DPN

Provided that the director engages with the above, their personal liability is taken to have been remitted. However, the director’s failure to act in accordance with the above within the nominated period “locks down” their liability, meaning it becomes a permanent personal debt that the ATO can pursue through various enforcement mechanisms.

Lockdown DPN’s

The ATO will issue a lockdown DPN to a company director where a company has failed to lodged its BAS, IAS or SGC statements within three months of the lodgement due date.

Unlike the non-lockdown DPN, directors who receive a lockdown DPN are held personally liable for the outstanding debt upon receipt. As such, the only avenue for directors to remit the penalty is to pay the outstanding debt to the ATO in full.

Defences

Depending upon your individual circumstances, directors may have various defences available to offset or discharge personal liability. Relevantly, defences to the DPN may include:

1. Illness, where there was a justifiable non-participation by the director in the management of the company during the period in which the liabilities accrued; or
2. All reasonable steps, where the director must demonstrate that they took  all reasonable steps to ensure the company paid its debts, appointed an administrator or small business restructuring practitioner, or commenced the winding up process.

ATO’s Enforcement Methods

If directors fail to comply with a DPN, and the aforementioned defences are not applicable, they should brace themselves for retaliatory action. In that regard, the ATO may employ several recovery mechanisms, including:

• Issuing garnishee notices to freeze and collect funds from the director’s accounts;
• Offsetting personal tax credits against the unpaid amounts; or
• Commencing legal action to against the director, personally.

In light of the above, the liabilities imposed on directors can be burdensome, such that it is crucial to engage a qualified taxation lawyer, agent or insolvency practitioner as matter of priority, following receipt of a DPN.

RAMSDEN LAWYERS – HOW WE CAN HELP

In light of the ATO’s aggressiveness towards debt recovery, acting proactively is more effective than acting reactively. The ATO’s position is unequivocal, and your response should be equally as decisive.

If you have received a DPN, or are navigating an outstanding taxation liability, we encourage you to seek legal advice as a matter of priority. Our Litigation and Dispute Resolution Division has specific expertise in navigating tax disputes, and we are happy to arrange an obligation-free initial consultation to assist you in navigating the relevant legislation for your circumstances.

The content of this article is intended to provide general guidance to the subject matter and must not be relied on as legal advice.  Specific advice should be sought about your circumstances.