The ATO can issue a director penalty notice (DPN) to directors of a company that does not pay its Pay as You Go withholding (i.e. the tax component of staff wages) or Superannuation Guarantee Charge (i.e. the super component of staff wages).
A director penalty notice warns a director that they are personally liable to pay a penalty equal to the company’s PAYG and SGC obligations. It will also lay out the options for avoiding the penalty. If no action is taken, the ATO can take recovery proceedings for the penalty.
There are two types of director penalty notices – a standard director penalty notice, or a ‘lockdown’ director penalty notice.
The ATO can issue a standard director penalty notice when the company has lodged its Business Activity Statement (BAS) or Instalment Activity Statement (IAS), but has not paid the tax debt.
The notice will say that you are liable to pay a penalty to the ATO that is equal to the unpaid PAYG or SCG amounts owed by the company.
You can avoid this personal liability by doing one of three things within 21 days:
It is important to remember that the 21 days run from when the ATO posts the notice, not when you receive it.
The ATO issues a director penalty notice by sending it to the address listed on the ASIC register, so you should make sure this address is always up to date.
The lockdown director penalty notice applies where the company has not lodged its BAS or IAS to the ATO within 3 months of their due date. If this is the case, you cannot avoid paying the penalty by placing the company into voluntary administration or liquidation. You will have to either pay the amount owed within 21 days or rely on one of the defences.
The defences available for either kind of director penalty notice are limited.
If you were unwell, or there was some other good reason that you could not take part in managing the company at the relevant time, then you may not be liable to pay the penalty.
If you took reasonable steps to make the company do the right thing, or to place the company into voluntary administration or liquidation, then you may not be liable for the penalty. You could also avoid the penalty if none of these reasonable steps were available to you. What is ‘reasonable’ in this case will depend on the circumstances, including when, and for how long, you were a director.
The ATO can issue a director penalty notice to a person who was a director of the company at the time the underlying obligations arose – e.g. when the amounts were withheld from employees’ wages (for PAYG withholding obligations) or when the quarter ends (for the SCG). This means that you can still be issued with a director penalty notice even if you have resigned as a director.
If you are resigning from a role as a director due to disagreements with other directors or an inability to have an input on how the company is managed, then you should keep records and documentation to support this. These records may help you if you are later issued with a director penalty notice and wish to rely on the ‘reasonable steps’ defence.
A new director can be issued with a director penalty notice if they became a director after the due date for a payment, and remain a director for at least the next 30 days.
Before you accept a role as a director, you should do some due diligence on the company to make sure that it has complied with its tax obligations.
We are specialist tax disputes lawyer with over a decade of experience in dealing with the ATO.
We’ve helped many companies to deal with their tax debt, including disputing the amount of tax debts and negotiating payment plans. We have also helped directors to deal with DPNs and lodge defences against the personal liability.
We work with clients all over Australia.We can do this because the tax issues we deal with are Federal – the tax law is the same no matter where in Australia you live.