Director Penalty Notices and Enforcement
Taxpayers and company directors are aware that the Australian Taxation Office (ATO) holds a special suite of powers beyond the usual debt recovery strategies that set them above the usual creditor however those powers have expanded in recent years.
Beyond a standard wind up action for companies and bankruptcy proceedings for individuals, the ATO’s powers extend to Director Penalty Notices, garnishee orders to third parties, estimates and default assessments.
As serious implications flow from non-compliance with the ATO’s requirements, it pays to be informed, upfront, lodge company statements on time and to maintain good order in the books.
The ATO’s Approach
To level the taxpayer’s playing field, the ATO has issued a statement entitled ‘Firmer approach to debt collection’, confirming its tough stance on non-complying businesses regarding unpaid tax liabilities, particularly those 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 the ability to meet their obligations
- avoid contact with the ATO.
With the expansion of the ATO’s powers since legislative amendments came into force in June 2012, it is imperative that directors and companies keep payments and contributions up to date and communicate with the ATO about the company’s position.
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 DPN and the Lockdown DPN.
Standard or ‘Non-Lockdown’ DPN
The ATO will issue a standard or non-lockdown DPN when the company has lodged its Business Activity Statements (BAS) or Instalment Activity Statements (IAS) but the debts remain unpaid.
The written notice will identify the unpaid amount of the company’s unpaid PAYGW or SGC liabilities (in the case of SGC, the amount will include a nominal interest component and administration fees) and stating that 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 who has 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 to pay all outstanding PAYG withholding liabilities and any outstanding SCG liabilities that were incurred after 30 June 2012 if the director has 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 do one of the following:
- Pay the outstanding debt, or
- Appoint a voluntary administrator, or
- Enter the company into liquidation.
Each and every director will owe the same amount under the DPN as the company’s total liability for tax so if the company’s unpaid debt is $15,000, each director’s DPN will be issued in the amount of $15,000.
With a Lockdown DPN (also referred to as the ‘three month lockdown’ provision), if the company fails to lodge its PAYG and/or SCG returns to the ATO within 3 months of their lodgment due date, the directors become automatically liable and cannot appoint a voluntary administrator or liquidator to avoid personal liability for payment.
The directors have to either 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 at any time, irrespective of whether the director has already placed the company into liquidation or voluntary administration.
Pursuant to s 260-5 TAA, the ATO has the power to issue a third party (ie a bank) who owes the company/director money requiring the party to pay it straight to the ATO. Any money garnisheed by the ATO cannot be recovered in a liquidation as an unfair preference. The Notice can ask for a percentage of wages or may seek payment of a lump sum amount. For individuals, that may mean the ATO issues a garnishee notice to your client’s employer or contractor and for businesses, the notice may issue to your client’s financial institution or trade debtor.
Non-lodgment: Estimates and Default Assessments
If the company is not forthcoming about its unpaid liabilities, the ATO can step in and estimate an outstanding PAYGW or SCG liability on behalf of the company giving notice to the company of their reasonable estimate (Subdivision 268B Schedule 1 TAA).
The estimate then becomes payable in its own right as a separate and parallel liability with the actual shortfall (s 268-20) although there is an opportunity to provide a statutory declaration specifying the actual amount of the liability.
Failure to pay the estimated sum results in the director being liable for a penalty and can then form the basis of a statutory demand to wind up the company pursuant to s 459 Corporations Act 2001 (Cth). The ATO further has the power to issue a default assessment (s 167 Income Tax Assessment Act 1936 (Cth)).
What Should Directors Do?
To avoid the long arm of the ATO directors should:
- Ensure ASIC details and records are up-to-date
- Report on time (BAS and Superannuation Guarantee Charge statements)
- Be proactive and timely in obtaining advice
- Remain informed about your PAYG and SGC payment obligations.
For more information on corporate insolvency or specific insolvency services, contact the team at Rapsey Griffiths on (02) 4929 3019 for a confidential consultation.