director penalty notice

I received a Director Penalty Notice: what do I do?

Summary: What is a Director Penalty Notice?

  • A Director Penalty Notice (DPN) is a tax enforcement instrument issued by the Australian Taxation Office for unpaid tax debt.
  • It is issued to directors of companies and if it is not complied with they become personally liable for the company’s unpaid tax debts.
  • A “lockdown” director penalty notice is an instrument that can only be discharged if the director actually pays the tax debt.

Receiving a Director Penalty Notice (DPN) will be a confronting experience for any company director. The director’s personal assets are at risk and if it is a “lockdown” DPN then the problem won’t be solved through a voluntary administration appointment.

Where the DPN is in respect of amounts which were reported to the ATO but unpaid within 3 months of the end of their reporting period the director can:

If the DPN relates to amounts both unpaid and unreported 3 months after the end of the reporting period, appointing a liquidator or voluntary administrator will no longer have the effect of extinguishing the director’s liability.

What are the defences to a Director Penalty Notice claim by the ATO?

What options are available to you when you don’t believe you should be responsible for the debt of the company? There are a number of defences available if the ATO commences proceedings against you. The defences include:

1. Illness

In cases where a director can show that, either through illness or some other good reason, they were not involved with the management of the company and that it was reasonable that they not be involved, the director will be able to escape personal liability.

2. Reasonable Steps

Directors can defend themselves against personal liability where they can show that they took all reasonable steps to ensure that:

  • The company complied with its obligations to pay;
  • An administrator of the company was appointed;
  • The company begin to be wound up; or
  • That no such steps were available.

What changed with the 2012 reforms?

The 2012 changes divided DPN into two categories:

  1. Obligations that were unpaid and unreported for more than three months beyond the due date for reporting; and
  2. Obligations that were unpaid by the due date but were reported in BAS and SGC Statements within the three month period of the due date for reporting.

In the first category unpaid and unreported obligations become a penalty imposed personally upon a director when the DPN is issued. However, under this category a director cannot escape personal liability by placing the company into voluntary administration or liquidation. The only way to remove the penalty is for the director or company to make payments of the debt in full (or ultimately go into personal bankruptcy).

In the second category a director can discharge personal liability for unpaid but otherwise correctly reported obligations by placing the company into voluntary administration or liquidation, or paying the outstanding debt. By notifying the ATO of outstanding amounts of PAYG and SGC when lodging the BAS or IAS the director will avoid the first category of DPN, i.e. a “lockdown” Director Penalty Notice.

2019 reforms: criminal sanctions

On 1 April 2019, new provisions were introduced to the Director Penalty Notice Regime which allow criminal sanctions to be sought for unremitted superannuation obligations. Under these provisions, the Commissioner may write to a director ordering payment of a Superannuation Guarantee Charge under the Superannuation Guarantee (Administration) Act 1992. This charge is composed of the shortfall amount plus interest on this amount (10%) and a quarterly administration fee calculated per employee ($20).

This direction does not create a separate liability to pay the outstanding sum, but an offence may be deemed to have been committed if the amount has not been paid.

Where the Commissioner has issued a direction and the liability is not discharged within the specified time, the director listed on the notice will have committed an offence of strict liability, occasioning a penalty of 50 penalty units, which is equivalent to $10,500, 12 months imprisonment, or both.

The mechanics of Director Penalty Notices

To recover a penalty from a director, the ATO will issue a DPN and must wait until the 22nd day after issuing that notice before commencing Court proceedings. Note that the timeframe for compliance with a DPN commences the date on which it is posted not the date it was actually received.

A DPN will be sent to the director at their residential address listed with ASIC and will describe the options that are available to a director in order to achieve remission of the director penalties.

If the DPN penalty is not discharged before the 22nd day after the Director Penalty Notice is given to the director, the penalty is not remitted and the director is liable for the penalty amount until it is paid in full. To enforce this claim, the ATO may then commence court proceedings against the director personally.

The ATO is empowered by the legislation to compel payment from a third party that holds amounts due to, or on behalf of, a taxpayer that is indebted to the ATO. Once a Director Penalty Notice has been issued, and the 21 day period had expired, the ATO is entitled to seek a garnishee order against any third party that owes money to, or holds money on behalf of, the relevant director, including a director’s personal bank accounts.

Limited remission or ‘lockdown’ rule

The first category of Director Penalty Notice set out above gives rise to a “lockdown” DPN.

Where the company has not reported the unpaid amounts within three months of the due date, the only option to have the associated penalty remitted is payment of the debt. The penalty cannot be remitted by placing the company into voluntary administration or liquidation. Ultimately if the director cannot negotiate a satisfactory outcome with the ATO and they can’t pay the debt personally they may need to consider personal bankruptcy.

Liability of former Directors

Directors remain liable under the DPN for penalties equal to unpaid PAYG withholding and SGC liabilities of the company which were due up to the date of their resignation.

Relevant legislation

Tax Laws Amendment (2012 Measures No. 2) Act 2012
Assented to 29 June 2012 amended the law relating to taxation and for related purposes.
Schedule 1- Companies’ non-compliance with PAYG withholding and superannuation guarantee obligations.

Superannuation Guarantee (Administration) Act 1992 (Cth)
To a limited extent this Act can provide a defence to a director’s liability for superannuation guarantee charge if the company took reasonable steps to comply with its obligations by adopting a reasonable interpretation of the Act, and consistently applying the interpretation.

Taxation Administration Act 1953 (Cth) Schedule 1 Division 269

Division 269- Penalties for directors of non-complying companies

269-1 What this Division is about

The directors of a company have a duty to ensure that the company either:
(a) meets its obligations under Subdivision 16-B (obligation to pay withheld amounts to the Commissioner) and Division 268 in this Schedule and Part 3 of the Superannuation Guarantee (Administration) Act 1992 (obligation to pay superannuation guarantee charge); or
(b) goes promptly into voluntary administration under the Corporations Act 2001 or into liquidation.
The directors’ duties are enforced by penalties.
Note: The duties this Division imposes on the directors of the company are in addition to the similar duties imposed on the public officer of the company. See subsection 252(1) of the Income Tax Assessment Act 1936 .

269-5 Object of Division

The object of this Division is to ensure that a company either:
(a) meets its obligations under:
(i) Subdivision 16-B (obligation to pay withheld amounts to the Commissioner); and
(ii) Division 268 (estimates of PAYG withholding liabilities and superannuation guarantee charge); and
(iii) Part 3 of the Superannuation Guarantee (Administration) Act 1992 (obligation to pay superannuation guarantee charge); or
(b) goes promptly into voluntary administration under the Corporations Act 2001 or into liquidation.
Note: The directors’ duties are enforced by penalties on the directors. A penalty recovered under this Division is applied towards meeting the company’s obligation

Subdivision 269-B — Obligations and penalties

269-15 Directors’ obligations

(1) The directors (within the meaning of the Corporations Act 2001 ) of the company (from time to time) on or after the initial day must cause the company to comply with its obligation.
(2) The directors of the company (from time to time) continue to be under their obligation until:
(a) the company complies with its obligation; or
(b) an administrator of the company is appointed under section 436A, 436B or 436C of the Corporations Act 2001 ; or
(c) the company begins to be wound up (within the meaning of that Act).
Instalment arrangements
(3) The Commissioner must not commence, or take a procedural step as a party to, proceedings to enforce an obligation, or to recover a penalty, of a director under this Division if an * arrangement that covers the company’s obligation is in force under section 255- 15 (Commissioner’s power to permit payments by instalments).
Note 1: The arrangement may also cover other obligations of the company.
Note 2: Subsection (3) does not prevent the Commissioner from giving a director a notice about a penalty under section 269-25

Subdivision 269-20 Penalty

Penalty for director on or before due day
(1) You are liable to pay to the Commissioner a penalty if:
(a) at the end of the due day, the directors of the company are still under an obligation under section 269- 15; and
(b) you were under that obligation at or before that time (because you were a director).
Note: Paragraph (1)(b) applies even if you stopped being a director before the end of the due day: see subsection 269- 15(2).
(2) The penalty is due and payable at the end of the due day.
Note: The Commissioner must not commence proceedings to recover the penalty until the end of 21 days after the Commissioner gives you notice of the penalty under section 269-25.
Penalty for new director
(3) You are also liable to pay to the Commissioner a penalty if:
(a) after the due day, you became a director of the company and began to be under an obligation under section 269- 15; and
(b) 30 days later, you are still under that obligation.
(4) The penalty is due and payable at the end of that 30th day.
Note: The Commissioner must not commence proceedings to recover the penalty until the end of 21 days after the Commissioner gives you notice of the penalty under section 269-25.
Amount of penalty
(5) The amount of a penalty under this section is equal to the unpaid amount of the company’s liability under its obligation.
Note 1: See section 269-40 for the effect on your penalty of the company discharging its obligation, or of another director paying his or her penalty.
Note 2: See section 269-45 for your rights of indemnity and contribution.

269-1 The directors of a company have a duty to ensure that the company either:

(a) meets its obligations under Subdivision 16- B (obligation to pay withheld amounts to the Commissioner) and Division 168 in this Schedule and Part 3 of the Superannuation Guarantee (Administration) Act 1992 (obligation to pay superannuation guarantee charge); or

(b) goes promptly into voluntary administration under the Corporations Act 2001 or into liquidation.

269-5 The object of Division 269 is to ensure that a company either:

(a) meets its obligations under:
(i) Subdivision 16-B (obligation to pay withheld amounts to the Commissioner); and
(ii) Division 268 (estimates of PAYG withholding liabilities and superannuation guarantee charge);
(iii) Part 3 of the Superannuation Guarantee (Administration) Act 1992 (obligation to pay superannuation guarantee charge); or

(b) goes promptly into voluntary administration under the Corporations Act 2001 or into liquidation.

For more information about director penalties, tax enforcement, and how to respond to financial and insolvency pressures as a director, check out these blog posts:

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