Expecting a director penalty notice? What defence do you have?
Article by Robyn Tyler
Are your business superannuation and Pay As You Go Withholding (PAYGW) obligations up to date with the Australian Taxation Office (ATO)?
If not, you may know that the ATO can recover these amounts from directors personally when the business is owned through a company structure? This includes where the business operated from a discretionary or unit trust with a corporate trustee.
It’s important to understand what Director Penalty Notices (DPNs) are and what defence you have against them.
Understanding Director Penalty Notices
If the ATO pursues a director personally for payment, they are required to issue a Director Penalty Notice.
This DPN must outline the unpaid amounts and remission options available to the director. Recovery options include:
- Offsetting any of your tax refunds against the director penalties;
- Garnishee notices; and
- Legal action to recover the director penalty.
Director Penalty Notices are time-critical. You only have 21 days from the date of the notice to achieve remission of any director penalties stated on the DPN (NOTE: date of notice NOT date of receipt).
If the unpaid PAYGW or superannuation is reported within three months of the original due date (or in the case of new directors, three months after their appointment), the penalty can be remitted by one of the following actions:
- Paying the debt
- Appointing an administrator
- Commencement of company wind up procedures
If the unpaid PAYGW or superannuation is reported more than three months after the due date, the only way to remit the penalty is the pay the debt.
What other courses of action are available with Director Penalty Notices?
It’s possible for a business to enter into a payment arrangement with the ATO to clear the debt.
When this occurs, the ATO will not seek to recover the penalty from directors personally. The ATO may continue to offset personal tax refunds against the company debt.
If the company defaults on the payment arrangement, the ATO can commence or recommence action to recover the director penalty. It is important to realise that the ATO does not need to issue a new DPN if the payment arrangement lapses.
The ATO can even issue a Director Penalty Notice when the liabilities have not been reported. In this situation, the ATO can make a “reasonable estimate” of the overdue, unpaid amount.
Director Penalty Notice: What legal defence do you have?
There are legal defences that outline the circumstances in which a director is not liable for director penalties.
It is possible to request the ATO consider a defence a director may have prior to commencing legal recovery proceedings. A director will not be liable for a director penalty if:
- The director did not take part (and it would have been unreasonable to expect the director to take part) in the management of the company during the relevant period due to illness, or some other good reason; or
- The director took all reasonable steps, to ensure that one of the following three things happened:
- The company paid the outstanding amount;
- An administrator was appointed to the company;
- The directors began winding up the company.
It is not a sufficient defence to claim that the director did not receive the DPN in sufficient time, or not at all. When issuing a Director Penalty Notice, the ATO will use the address registered with Australian Securities & Investment Commission.
A director is also not able to claim that they are not an “active” director. All company directors are considered responsible for ensuring the business meets its PAYGW and superannuation obligations.
Even after resigning, directors can remain liable for director penalties equal to the unpaid PAYGW and superannuation liabilities of the business that were incurred prior to resignation.
What precautions should you take against new DPN guidelines?
As part of the 2018-19 budget, the government has proposed to extend the Director Penalty Notice regime to include GST, luxury car tax and wine equalisation tax.
The inclusion of GST in the director penalty regime, in particular, will be significant for small and medium businesses; GST tends to be one of the larger unsecured liabilities.
There are a number of actions that business directors should take as precautions against these regulations:
- Ensure that reporting happens on time, every time – for superannuation, PAYGW and GST
- If cash flow gets tough – talk to your advisor early
- If you can’t pay the ATO on time – get a payment arrangement in place
If you have any other questions about this, please call your advisor.
