Director Penalty Notices: ATO enforcement activity has recommenced

The ATO almost completely deferred debt collection action for two years due to COVID-19. Now, as economic activity returns to the “new normal”, it has sharply recommenced enforcement activity for those taxpayers that have not engaged, are higher risk or have unpaid superannuation guarantee debts. A key development is the “lockdown” Director Penalty Notice (DPN), which is being sent to directors when lodgements are not up to date and tax is overdue. If a director receives a “lockdown” DPN, they must pay the tax within 21 days or face personal liability.

In March 2022, the ATO issued letters to businesses with outstanding tax liabilities under two key awareness programs:

1. letters with respect to tax liabilities greater than $100,000 were issued to 29,552 taxpayers to create awareness that the amounts were overdue; and

2. letters cautioning the possibility of a DPN unless outstanding amounts are paid or a payment plan is entered into, were issued to 52,319 directors.

The ATO is now issuing between 30-40 DPNs each day and that number is expected to increase. The receipt of a DPN is a very serious matter, which should be dealt with urgently as it impacts the company (taxpayer) and puts directors’ personal assets at risk

What are Director Penalty Notices?

Most unsecured creditors cannot recover debts from a director personally without a personal guarantee. An exception is the ATO – where directors can become personally liable for a penalty equal to the value of a company’s outstanding superannuation, PAYG withholding and GST obligations.

Before becoming personally liable for a company’s superannuation, PAYG and GST liabilities, the ATO must issue the directors with a DPN. There are two types of DPNs:

1. ”Non lockdown” relating to when a company has lodged GST and PAYG statements within three months of the due date and has reported superannuation guarantee contributions by the due date, but the relevant liabilities have not been paid; or

2. “Lockdown” relating to when GST, PAYG and superannuation returns have not been lodged within the timeframes outlined above and the relevant liabilities have not been paid.

The options available to a director following receipt of a DPN

Directors have 21 days to respond to a DPN before becoming personally liable. Therefore, it is imperative that directors take immediate action following receipt to avoid putting personal assets at risk.
The options available to directors depend on the type of DPN issued.

Non lockdown

Following receipt of a “non lockdown” DPN, directors must do one of the following within 21 days to avoid personal liability:

• Pay the debt;

• Appoint a voluntary administrator;

• Appoint a small business restructuring practitioner; or

• Appoint a liquidator to wind up the company.

The option to avoid personal liability by causing the company to enter into a payment arrangement is no longer available.

Lockdown

The only option available to directors to avoid personal liability following receipt of a “lockdown” DPN is to pay the debt. In the event of a “lockdown” DPN, the ATO will often estimate the tax liability.

Key takeaways

• Open lines of communication and engage early with the ATO (prior to a DPN being issued). The ATO’s preferred approach is to work with taxpayers to resolve outstanding tax liabilities through engagement rather than enforcement.

• Ensure GST and PAYG statements are lodged within three months of the due date and superannuation guarantee statement submitted by the due date, irrespective of whether the company has funds to pay.

• Directors must act quickly if they receive a “non lockdown” DPN or risk becoming personally liable for their company’s debt. Either cause the company to pay the debt in full or seek help from a restructuring practitioner, who can explain the external administration options available.

• If directors receive a “lockdown” DPN, then they must pay the debt within 21 days or face personal liability.

How can McGrathNicol help?

We work with directors and their advisors (accounting, financial and legal) to navigate periods of financial and operational challenge and distress, including dealing with major creditors. Our team specialises in partnering with boards, management teams and financiers to quickly identify root causes, formulate turnaround strategies and implement value-maximising restructures.

For further information on how McGrathNicol can assist you, please contact a member of our team.