What is a DPN? A Director Penalty Notice (DPN) is a notice issued by the Australian Taxation Office (ATO) that holds a company director personally liable for a tax debt. Upon issuance, the director becomes personally liable, allowing the ATO to take direct action. DPNs can be issued for several types of company tax debts, including:
· Pay As You Go (PAYG);
· Superannuation Guarantee Charge (SGC); and
· Goods and Services Tax (GST).
Upon receiving a DPN, it is crucial to identify which type of notice has been issued to take prompt action. There are two types of DPNs: ‘non-lockdown’ and ‘lockdown’ DPNs.
What is a non-lockdown DPN? A non-lockdown DPN is issued when a company has lodged its activity statements within 3 months of the due date or the SGC charge statement within 1 month of the due date, but the debt remains unpaid. While the debt may be unpaid, timely notification to the ATO about the tax debt has been made.
With a non-lockdown DPN, a director has 21 days to take one of the following actions to avoid personal liability:
1. Pay the debt in full;
2. Appoint a voluntary administrator;
3. Appoint a small business restructuring practitioner; or
4. Appoint a liquidator.
Entering into a payment arrangement alone is insufficient to resolve the non-lockdown DPN. Failure to act within the 21-day period results in the personal liability being fixed, and the only option left would be to pay the debt in full or establish a limited defence.
In three recent Western Australian Supreme Court decisions—Perin v ASIC, Re Dreampoint Pty Ltd (Deregistered), and Gregg v ASIC—directors of de-registered companies re-registered them and appointed liquidators to comply with non-lockdown DPNs. The Perin v ASIC case, in particular, highlighted that the decision to liquidate was deemed effective even before the company’s formal re-registration by ASIC, ensuring compliance within the 21-day timeframe.
What is a lockdown DPN? A lockdown DPN is issued when the company fails to notify the ATO of tax debts within the required timeframes (three months for PAYG and GST, and 28 days for SGC) and has not paid the liability. In this scenario, the only way to comply with the lockdown DPN is to pay the debt in full within 21 days. Failure to do so results in the director’s personal liability becoming “locked down.”
Defences Available to Directors Once a DPN is issued, there are limited defences available if the 21-day period has passed. These defences depend on the specific facts of each case and include:
1. Illness or other reasonable cause: If the director or a close family member suffered from illness or another valid reason that made it unreasonable for the director to participate in managing the company.
2. Reasonable steps: If the director took all reasonable steps to ensure the company:
o Complied with its tax obligations;
o Appointed an administrator;
o Appointed a small business restructuring practitioner; or
o Commenced winding up.
3. For SGC and GST debts only: If the director took reasonable care and reasonably believed that the superannuation or GST legislation applied differently in a way that was reasonably arguable.
What if My Company Has Been Placed into Liquidation and the Debt Was Paid? Some DPNs are issued in error, where the debt listed may have already been paid. It is always worth seeking advice to determine whether the DPN is valid and whether it is a lockdown or non-lockdown DPN. Additionally, exploring potential defences could be beneficial.
Engaging with the ATO Regarding a DPN Directors often face frustration when dealing with the ATO regarding DPNs. Many experience long delays and a lack of communication from the ATO, which can lead to uncertainty about whether the debt remains outstanding or whether the ATO will act on the notice. In some cases, escalating the matter to the Court for review may be necessary if the ATO fails to respond or address the issue.
Only time will tell if the ATO will prioritise legal action to recover debts listed in DPNs, but directors should not wait for the ATO to act. Instead, they should be proactive in seeking resolution.
What Action Can the ATO Take on an Expired DPN? If a DPN expires without resolution, the ATO can take additional action beyond court proceedings. This includes offsetting tax refunds or garnishing funds from bank accounts or payments owed by third parties.
Companies, directors, and advisors need to stay alert to the ATO’s increased focus on recovering unpaid tax debts, as the consequences can be severe.
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By acting promptly and seeking professional guidance, directors can avoid the heavy burden of personal liability arising from a DPN. If you’ve received a DPN, it is crucial to act swiftly—contact us today for a complimentary consultation and protect your interests.