Director Penalty Notices – the “What”, the “When” and the “How”
Posted on October 01, 2024
Director Penalty Notices (DPNs) are becoming an increasingly utilised tool by the Australian Taxation Office (ATO).
DPNs have serious personal consequences for directors, and so it is crucial that all directors ensure that they are familiar with DPNs, and know what to do when one is received.
Below, we address the “What”, the “When” and the “How” of DPNs.
The “What”
A DPN is a tool used by the ATO to, essentially, “pierce the corporate veil” and cause directors to become personally liable for a company’s unpaid PAYGW, GST and SGC.
A DPN can be issued to:
- a person who was a director of a company at the time when the company did not meet its PAYGW, GST and SGC obligations; or
- a “new” director of the company that does not, within 30 days of their appointment, cause the company to:
- meet its outstanding obligations; or
- appoint an insolvency practitioner.
Once a DPN is served, a director has 21 days to address the DPN, failing which the director becomes personally liable for the amounts set out in the notice.
The “When”
A DPN will be issued when a company has failed to meet its PAYGW, GST and SGC obligations.
There are two different types of DPNs - commonly referred to as a “standard” DPN and a “lockdown” DPN.
Whilst the physical notices themselves look similar, their consequences are entirely different. It is therefore critical that steps are taken to immediately determine which type of DPN has been issued.
What is a “standard” DPN?
A standard DPN is issued to directors of companies that:
- have reported PAYGW and GST within three months of their due date and SGC obligations by the due date; but
- have not remitted amounts payable to the ATO.
What is a “lockdown” DPN?
By contrast, a lockdown DPN is issued to directors of companies that:
- did not report PAYGW and GST within three months of their due date, or SGC obligations by the due date (or indeed, at all); and
- have not remitted amounts payable to the ATO.
The “How”
How is a DPN served?
DPNs are served by posting them to a director at (a) their address as recorded with ASIC or (b) their address as maintained by the ATO.
Directors must ensure that their details are current and updated at all times, otherwise, these notices might not come to your attention.
DPNs are “deemed served” on the date that they are placed in the post box by an ATO representative – the 21-day period begins on this date. The date of receipt is irrelevant for the purposes of calculating time for compliance.
How to address a DPN once received?
To address a standard DPN and avoid personal liability, the director must, within 21 days of service:
- make (or cause the company to make) payment of the amounts in the notice in full; or
- appoint an insolvency practitioner to the company.
Lockdown DPNs are far less forgiving, and the only way they can be addressed, and personal liability avoided, is to make (or cause the company to make) payment of the amounts in the notice in full within 21 days of service.
How to deal with a DPN once personal liability crystalises?
If the DPN is not addressed within the 21-day period, the director will become personally liable and the ATO will, at some point, take steps to recover that debt.
Directors have two main options in this scenario:
- establish a defence pursuant to section 269-35 of Schedule 1 to the Taxation Administration Act 1953 (Cth); or
- negotiate a repayment arrangement with the ATO.
To establish a defence to a DPN under section 269-35 of Schedule 1 to the Taxation Administration Act 1953 (Cth), a director must be able to prove that either:
- they did not take part in the management of the company during the relevant period due to illness or some other good reason;
- they took all reasonable steps to ensure the company paid all outstanding amounts on time, or otherwise appointed an insolvency practitioner; and
- in relation to SGC liabilities only – the company treated the relevant act as applying in a way that could be reasonably argued was in accordance with the law.
These defences are technical and difficult to establish. Legal advice is crucial at this stage.
The “Upshot”
Dealing with a DPN requires quick action. Directors will require legal advice to understand their options and mitigate or minimise their exposure (where possible).
It is important that directors remain vigilant and proactive when a DPN is received.
If you have received a DPN and require legal advice about your options, please do not hesitate to contact our specialist team.
Written by Alice Carter, Partner, Georgia Gray, Senior Associate, and Stephanie Piantadosi, Associate.
