The last 12 months have seen a significant increase in the number of penalty notices issued to directors of companies that have failed to meet their tax and superannuation obligations.

Although the ATO adopted a lenient approach to the recovery of outstanding tax and superannuation debts throughout 2020 and 2021, placing most debt recovery action on hold to provide temporary relief to the many businesses impacted by the dire economic conditions presented throughout the COVID-19 pandemic, that grace period has well and truly come to an end.

If you find a director penalty notice (DPN) waiting for you in the letterbox, it is critical that you take prompt action to avoid incurring personal liability for the company’s tax debts.

This is the first of a series of articles examining the DPN regime and the avenues which may be available to directors who receive a DPN.

Director’s obligations.

Directors are vested with broad powers to control a company’s operations, management and strategic direction. However, with great power comes great responsibility. The raft of duties and responsibilities imposed on directors arise under the company’s constitution, general law, equitable principles and through legislation.

Most directors are aware of their statutory duties under the Corporations Act 2001 (Cth). However, directors are often less familiar with their additional duties under the Taxation Administration Act 1953 (Cth) (the Act). Section 269-15 of schedule 1 to the Act imposes a broad duty on directors to ensure that a company complies with its tax and superannuation obligations. If a director fails to discharge that duty, the ATO may issue a director penalty notice under section 269-25 of schedule 1 to the Act.

What is a DPN?

A DPN is an enforcement mechanism which allows the ATO to recover a company’s unpaid tax and superannuation liabilities from its directors.

A DPN is a prerequisite to the ATO commencing recovery action. Accordingly, a failure to comply with a DPN may result in the ATO commencing legal proceedings against a director to recover the company’s liabilities specified in the schedule to the DPN.

A DPN can impose personal liability on a director for their company’s failure to report and/or remit:

(a) pay as you go withholding tax (PAYGW);
(b) the superannuation guarantee charge (SGC); and
(c) goods and services tax (GST).

Lockdown and non-lockdown DPNs

The Act contemplates two types of DPNs: lockdown and non-lockdown DPNs. The options available to a director in receipt of a DPN will depend on the type of DPN issued. The ATO can issue a lockdown DPN where a company:

(a) fails to lodge its business activity or SGC statements on time; and
(b) fails to pay its PAYGW, SGC or GST liabilities by the relevant due date.

The only means for a director to avoid personal liability under a lockdown DPN is to cause the company to pay the liability specified in the notice within 21 days after the date of the notice, or to avail themselves of one of the statutory defences available under the Act. On the other hand, the ATO may issue a non-lockdown DPN where a company:

(a) has lodged its business activity statements within 3 months after the due date;
(b) has lodged its SGC statements by the due date;
(c) but fails to remit its PAYGW, SGC or GST liabilities to the ATO by the relevant due date.

Options for a director who receives a non-lockdown DPN

Non-lockdown DPNs provide directors with a greater range of options to avoid personal liability when compared to the avenues available to directors in receipt of a lockdown DPN. A director who receives a non-lockdown DPN must, within 21 days after the date of the notice:

(a) cause the company to pay its outstanding PAYG, SGC or GST liabilities specified in the notice;
(b) place the company into administration;
(c) appoint a small business restructuring practitioner; or
(d) place the company into liquidation.

Prior to the COVID-19 pandemic, non-lockdown DPNs also enabled directors to avoid personal liability by causing the company to enter into a payment plan in respect of its outstanding tax and superannuation liabilities. However, it appears that this is no longer an option for directors in receipt of a non-lockdown DPN. This change is consistent with the decision of the Federal Court of Australia in Clifton v Kerry J Investment Pty Ltd (t/as Clenergy) [2020] FCAFC 5, where the Full Court held at [504] that:

“[a]s a matter of construction, it is clear in our view that a [payment arrangement] does not vary the time at which a liability to the Commissioner is due and payable.”

In other words, causing a company to enter into a payment arrangement in respect of its outstanding GST, PAYGW or SGC liabilities will not defer the due date for payment of those liabilities, nor will it enable a director in receipt of a DPN to avoid personal liability for those debts.

Possible defences

The Act contains a limited range of defences for directors in receipt of a DPN.

We will examine these defences in further detail in the next instalment in this series of articles however, in summary, a director may have a defence under section 269-35 of the Act if:

(a) the director did not take part (and it would have been unreasonable to expect the director to take part) in the management of the company during the relevant period due to illness or for some other “good reason”; or
(b) the director took all reasonable steps (unless there were no reasonable steps available to the director) to ensure the directors caused:

(i) the company to comply with its superannuation and taxation obligations;
(ii) an administrator of the company to be appointed;
(iii) a small business restructuring practitioner for the company to be appointed; or
(iv) the company to begin the winding up process.

Having regard to the strict time limits to comply with a DPN, and the serious personal consequences for directors who fail to comply with a DPN, it is critical that directors act promptly and prudently as soon as they receive a DPN.

Pigott Stinson has recently assisted a number of clients who have received DPNs. Should you wish to discuss any aspect of this article or want legal advice about these matters, please call us on 02 8251 7777 or contact the following members of our Litigation and Dispute Resolution team:

Daniel Fleming, partner: d.fleming@pigott.com.au
Eleni Bastoulis, associate: e.bastoulis@pigott.com.au
Cameron Sydes, solicitor: cameron.sydes@pigott.com.au

This publication is produced by Pigott Stinson. It is intended to provide general information only. The contents of this publication do not constitute legal advice and should not be relied upon as legal advice. Formal legal advice should be sought from us in respect of the matters set out in this publication. Liability limited by a scheme approved under Professional Standards Legislation.