By Chloe Moorfoot (Partner), Olivia Cassano (Lawyer) and Daniel Conti (Law Graduate)
The Australian Taxation Office (ATO) has resumed pursuit of unpaid taxes, including the issuing of Director Penalty Notices (DPNs), as it seeks to recoup losses incurred during the COVID-19 pandemic.
Division 269, Schedule 1 of the Taxation Administration Act 1953 (Cth) (Act) places an obligation on company directors to ensure that the company meets its tax obligations in respect of PAYG withholding, GST or superannuation guarantee charge. If such tax obligations are not paid when due, the directors become personally liable for penalties equal to the unpaid amounts.
To commence proceedings to collect such unpaid amounts from a director, the ATO must first issue the director with a DPN. There are two different types of DPN:
- Non-Lockdown DPN are issued to directors where the business activity statements have been lodged within three months of the due date, but the debt to the ATO remains unpaid; and
- Lockdown DPN are issued to directors where the business activity statements have not been lodged (or were lodged more than three months after the due date) and the debt to the ATO remains unpaid.
For non-lockdown DPNs there are several ways to remit a penalty, depending on the type of liability owed, provided that action is taken within 21 days from the date of the notice (not when the notice is received by the director). These include:
- paying the debt in full;
- appointing a voluntary administrator or a small business restructuring practitioner; and
- placing the company into liquidation.
Unfortunately, for lockdown DPNs the only way to remit the liability is to pay the amount of the DPN in full.
Are there defences available?
Of course, there are several defences to a DPN, being that the director:
- because of illness or for some other good reason, it would have been unreasonable to expect that director to take part, and that director did not take part, in the management of the company; or
- took all reasonable steps to ensure that:
- The directors caused the company to comply with its obligation;
- The directors caused an administrator of the company to be appointed;
- The directors caused a small business restructuring practitioner for the company to be appointed;
- The directors caused the company to begin to be wound up; or
- There were no reasonable steps that you could have taken to ensure that any of those things happened.
Moreover, a director will not be liable to the extent that the penalty resulted from the company treating the Superannuation Guarantee (Administration) Act 1992 or the GST Act as applying to a matter or identical matters in a particular way that was reasonably arguable, if the company took reasonable care in connection with applying that Act to the matter or matters.
DPNs operate in a similar fashion to section 588FGA(2) of the Corporations Act 2001. Under s 588FGA(2), directors may be liable to indemnify the ATO in respect of any loss or damage arising from an order by the Court or ASIC that a company transaction is voidable in insolvency.
It is anticipated the ATO will continue to ramp up its enforcement action to recover unpaid debts in the coming months. It is strongly recommended that directors, and company advisors, act now to review the company’s outstanding tax obligations. At a minimum, directors should be reviewing the timing of the company’s lodgements to confirm if they fall into the Lockdown DPN or Non-Lockdown DPN categories and companies should be taking proactive steps to reduce any outstanding debts to the ATO.
FAL has extensive experience with litigation and insolvency across a broad spectrum of industries, including significant debts to the ATO. If you would like further information about director penalty notices or overdue tax debts, FAL is here to help.
Please contact partner Chloe Moorfoot, Partner, for more information.