The Australian Tax Office has flagged an important change in its approach to debt collection and insolvency, with a return to full-time status for its collections department. Recovery of debts is a “key focus” of the ATO’s payment and debt strategies moving forward. Businesses, and Directors, need to be aware of the actions the ATO can take moving forward, including the use of Director Penalty Notices (DPNs). Recently, the ATO sent approximately 50,000 letters to directors at their home address warning of the personal consequences on directors on non-compliance of companies to tax obligations.
What are Director Penalty Notices?
As a company director, you become personally liable for the company’s unpaid amounts of pay as you go (PAYG), goods and services tax (GST) and (SGC). These amounts that you are personally liable for are called director penalties. The ATO can recover the penalty amounts from you once they issue you a Director Penalty Notice.
Hence, a Director Penalty Notice (DPN) is a notice that the ATO issues to the director of a company with outstanding or non-reported tax debts. If the notice is not complied with, and the tax liability still holds for 21 days from when the notice is sent, the directors are assumed to be personally liable for all the debts. Subsequently, the ATO can also begin proceedings against them to recover the outstanding tax liability.
What are the different types of Director Penalty Notices?
1. A Non-Lockdown or Standard DPN
These are issued when a company has lodged the relevant returns with the ATO within the required time frames but has not yet paid the amounts owing.
The timeframes allowed for lodging returns are:
• GST and PAYG –within 3 months of their due date.
• Superannuation Guarantee Statement (SGC) – the SGC return must be lodged within 1 month and 28 days after the end of the quarter it relates to.
2. A Lockdown DPN
These apply when a company has not lodged its GST/PAYG or SGC returns, or within the timeframes noted above.
How can DPNs and Personal Liability be avoided?
The best course of action to avoid getting a DPN is prevention. This requires directors to personally oversee that all obligations, which include GST, PAYG, and SGC, are paid in due time.
Furthermore, for directors to ensure that personal liability is avoided, they can take a couple of steps to avoid it. These steps are as follows:
• Pay the actual debt
• Place the company into Voluntary Administration
• Appoint a small business restructuring practitioner (SBRP)
• Place the company into Voluntary Liquidation
However, specific eligibility criteria need to be followed by companies to determine which course of action suits them the best.
What to do when a DPN is issued?
When a non-lockdown DPN is issued, the director is supposed to seek specialist advice from legal experts, like accountants or insolvency practitioners. In addition, there are strict deadlines when a DPN is issued. Therefore, once the DPN is issued, the director must act swiftly to avoid personal liability.
It is also imperative for directors to work proactively to ensure that the company’s reporting is accurate and meets all the relevant deadlines.
Furthermore, it is also essential to get a head start on all tax liability-related measures, by consulting with your accountant and discussing other protective options. Audit Shield, for example, is an optional tax audit insurance designed to provide relief from the professional fees associated with government initiated revenue audit activity.