Taxpayers and company directors know the Australian Taxation Office (ATO) holds special powers beyond the usual debt recovery strategies that sets them above the usual creditor.
However, in recent years those powers have expanded.
Beyond the standard wind-up actions for companies and bankruptcy proceedings for individuals, the ATO’s powers now extend to Director Penalty Notices, garnishee orders to third parties, estimates and default assessments.
Not complying with the ATO’s requirements can have serious implications. So you need to be informed, be upfront, lodge company statements on time and keep your books in good order.
The ATO’s Tough Stance
To level the taxpayer’s playing field, the ATO issued a statement confirming its tough stance on non-complying businesses regarding unpaid tax liabilities, particularly companies that:
repeatedly default on payment arrangements
avoid financial obligations by liquidating companies and setting up new business entities (phoenix activity)
are experiencing escalating debt with no signs of being able to meet their obligations
avoid contact with the ATO.
With the ATO’s powers expanding since legislative amendments came into force in June 2012, directors and companies must:
keep payments and contributions up-to-date
communicate with the ATO about the company’s position.
What are Director Penalty Notices (DPNs)?
One of the most powerful tools wielded by the ATO is the ability to issue a Director Penalty Notice (DPN) against company directors for certain company debts including Pay as You Go (Withholding) (PAYGW) and Superannuation Guarantee Charge (SGC).
The Director Penalty regime is contained within Division 269 in Schedule 1 to the Taxation Administration Act 1953 (TAA).
Under that regime, the ATO now distinguishes between two types of DPN: the Standard (or ‘non-lockdown’) DPN and the Lockdown DPN.
The ATO will issue a standard DPN when the company has lodged its Business Activity Statements (BAS) or Instalment Activity Statements (IAS) but hasn’t paid the debts.
The written notice will identify the unpaid amount of the company’s unpaid PAYGW or SGC liabilities (SGC amounts will include a nominal interest component and administration fees) and state the director is liable to pay the ATO that amount as a penalty.
The ATO can issue the DPN against a director who has resigned or come on board since the liabilities were incurred provided they have been in office for more than 30 days (including shadow and de facto directors). This means a newly-appointed director can be liable for all outstanding PAYG withholding liabilities and any outstanding SGC liabilities incurred after 30 June 2012 if they have been in office for more than 30 days.
The DPN is sent to the last known ASIC company address, so the onus is on directors to keep their registered ASIC details and company records up-to-date.
Once a DPN is issued, the director has 21 days (from the date the notice was posted, not received) to either:
Pay the outstanding debt
Appoint a voluntary administrator
Enter the company into liquidation.
And under the DPN, every director will owe the same amount as the company’s ?total tax liability. If the company’s unpaid debt is $15,000, each director’s DPN amount will be $15,000.
A Lockdown DPN (also known as the ‘three month lockdown’ provision) is triggered when the company fails to lodge its PAYG and/or SGC returns to the ATO within three months of their lodgment due date.
The Directors are automatically liable and can’t appoint a voluntary administrator or liquidator to avoid personal liability for payment. They have to pay the debt in full, enter into personal insolvency or rely on one of the defence provisions (s 269-35, Schedule 1 TAA).
A Lockdown DPN can be issued even if the director has already placed the company into liquidation or voluntary administration.
Pursuant to s 260-5 TAA, the ATO has the power to order a third party (e.g. a bank) who owes the company/director money to pay it straight to the ATO. The Notice can ask for either a percentage of wages or a lump sum amount.
Any money garnisheed by the ATO cannot be recovered in a liquidation as an unfair preference.
For individuals, the ATO may issue a garnishee notice to your client’s employer or contractor. For businesses, the notice may be issued to your client’s financial institution or trade debtor.
Non-lodgement: Estimates and Default Assessments
If the company isn’t forthcoming about its unpaid liabilities, the ATO can estimate an outstanding PAYGW or SGC liability on behalf of the company and give notice to the company of their reasonable estimate (Subdivision 268B Schedule 1 TAA).
This estimate then becomes payable in its own right as a separate and parallel liability with the actual shortfall (s 268-20). There is, however, an opportunity to provide a statutory declaration specifying the actual amount of the liability.
If the director fails to pay the estimated sum, they will be liable for a penalty which can then form the basis of a statutory demand to wind up the company pursuant to s 459 Corporations Act 2001 (Cth).
The ATO has further power to issue a default assessment (s 167 Income Tax Assessment Act 1936 (Cth)).
4 Things Directors Should Do
To avoid the long arm of the ATO, directors should:
Ensure their ASIC details and records are up-to-date
Report their BAS and Superannuation Guarantee Charge statements on time
Be proactive and timely about obtaining advice
Keep up-to-date with their PAYG and SGC payment obligations.
For more information on DPNs and the powers of the ATO, contact the team at Rapsey Griffiths on (02) 4929 3019 to arrange a confidential consultation.