Responding to Directors Penalty Notices – The Importance of Acting Quickly

The ATO’s stance on recovering unpaid taxes is stronger than ever.

Recovery mechanisms being employed by the ATO include enforcement of strict compliance with payment plans (even a one day delay triggers default), issuing Court proceedings on individual and partnership debt, and issuing Director Penalty Notices (DPNs). More than 30,000 DPNs were issued in the first quarter of 2024, and they have continued at a rapid rate.

It is important that DPNs be addressed promptly. Failure to do so may result in personal liability for directors of company tax debt. Below is a list of key tips in dealing with DPNs.

Act quickly

Directors have 21 days to respond to the DPN, calculated from the date that the notice was posted (the issue date of the notice). Postal time means that a director has less than 21 days to both obtain advice on strategy and, where appropriate, implement the next step. This can be a tight timeframe, particularly if the facts are complicated or, as is commonly the case, the debt cannot be promptly paid in full.

If you are (or were) a director of a company that has unpaid tax debt, even if that company has already gone into administration or liquidation, it is important to check your letterbox so that valuable days are not lost. We can assist you in reviewing the DPN and putting in place a strategy.

This leads to the second point.

Make sure that the ASIC database is accurate

The ATO will:

• use ASIC’s records to determine when a person was a director of the relevant company for the purpose of calculating director penalties; and
• post DPNs to the address as recorded on the ASIC database.

The responsibility for ensuring that the ASIC database is correct lies on the director; the Courts have confirmed that no extensions of time or reduction in the debt will apply if the director did not respond because the address recorded by ASIC was outdated.[1]

Make sure that on the ASIC database:

• your address is correct;
• the dates for your directorship are correct; and
• if you resigned as a director, that resignation is recorded on the ASIC register (with correct dates).

When resigning as a director, the paperwork should be lodged promptly. If ASIC is not notified within 28 days of your resignation, the effective resignation date will be the lodgment date for the ASIC notification. This can lead to a larger potential ‘exposure period’ for DPN debts than may otherwise apply.

Check the accuracy of the DPN

Given the high number of DPNs being issued, it is not surprising that some contain errors. This can include, for example:

• incorrectly stating that ATO lodgments were not submitted within the necessary timeframes;
• claiming tax debt, such as superannuation guarantee charges, for periods after the relevant employees were terminated in the company’s liquidation;
• claiming director penalties for periods where the company was put into administration or liquidation before the due day for reporting and payment of relevant tax obligations, meaning there is no director’s penalty;
• claiming interest and penalties that had previously been waived by agreement with the ATO (in circumstances where the taxpayer had complied with their obligations under the agreement); and
• incorrect calculations.

Make sure that the amounts and dates set out in the DPN are accurate. It is important that you understand the company’s tax position and lodgment status.

We can work with you through the detail of the DPN and assist you in determining whether it is accurate and enforceable.

Know your options

Non-Lockdown DPNs

There are two types of DPNs: ‘lockdown’ and ‘non-lockdown’ DPNs. It is important to understand the difference and determine which applies, as it will have an impact on the options available to the director.

‘Non-lockdown’ DPNs apply where the lodgments have been submitted within the relevant timeframe, but the tax has not been paid. Under ‘non-lockdown’ DPNs, the director has 21 days to take certain steps (see below), otherwise they will remain personally liable for the tax debt.

The relevant timeframes are:

Tax liabilityRelevant timeframePAYG withholding and GSTWithin three months of the due date for lodgment of the business activity statement (BAS) and instalment activity statements (IAS)SuperannuationBy the due date for lodgment of the superannuation guarantee charge (SGC) – ie. one month and 28 days after the end of the relevant quarter.

For non-lockdown DPNs, directors can remove personal liability for the debts by taking one of the following steps within the 21-day period:

• have the company pay the debt;
• appoint a voluntary administrator;
• appoint a small business restructuring practitioner; or
• appoint a liquidator.

Importantly, entering an ATO payment arrangement within the 21-day period will not remove the director’s personal liability for the debt. Once the 21-day period lapses (generally, during the payment plan), personal liability will remain and then likely be acted upon by the ATO if the payment plan defaults.

Lockdown DPNs

‘Lockdown’ DPNs are issued when the lodgments have not been submitted within the relevant timeframes. There is no ability for the director to remove personal liability, unless they have a defence.

How NB Commercial Law

NB Commercial Law can assist in responding to DPNs and also on advising on whether any relevant defences are available. Take advantage of our complimentary 30-minute consultation to discuss your legal needs with our experienced team. Contact us today to get started.