We answer three common and critical questions.
At Worrells we receive many enquiries regarding director penalty notices (DPN), including three common questions:
- How to work out if a DPN is for a lockdown or non-lockdown director penalty?
- How to know if a DPN has already been received?
- What happens when the 21 days is up for a DPN?
Before we dive into each question, we'll run through what a director penalty is and the types of DPNs.
What is a director penalty?
A company director is responsible for ensuring that the company's tax and superannuation obligations are both reported and also paid on time. A director becomes personally liable for a penalty at the end of the day the company is due to pay its obligation for any unpaid:
- pay as you go (PAYG) withholding.
- "net" GST (goods and services tax, wine equalisation tax, and luxury car tax)i.
- superannuation obligationsii.
The penalty is imposed automatically, by operation of law, as soon as the company fails to pay the debt by the due date. The penalty is equal to the amount of the outstanding and overdue debt.
Where does the DPN fit in?
A common misunderstanding is the DPN makes a director personally liable for the debt. This is not the case. As noted above, a director becomes personally liable for the debt before the ATO even issues a DPN. The DPN serves two main purposes:
- The ATO cannot bring recovery proceedings against a director until 21 days after it has issued a DPN and it has not been complied with.
- In limited circumstances, the director can remit (i.e. cancel) their personal liability, by taking certain actions within 21 days of the DPN being issued.
There are two types of director penalties:
- Non-lockdown.
- Lockdown.
Non-lockdown director penalty
A DPN will be issued for a non-lockdown director penalty where the relevant obligations are unpaid and the company has reported the debt to the ATO as follows:
- for PAYG withholding and GST, within three months of the due date for lodgment of business activity statements (BAS) and instalment activity statements (IAS)
- for superannuation, by the due date for lodgment of the superannuation guarantee charge (SGC) statement (being one month and 28 days after the end of the relevant quarter)iii.
A non-lockdown DPN gives a director 21 days from the date of the notice to take one of four actions, which will result in the director penalty being "remitted" (i.e. cancelled) as a personal liability of the director. These options are:
- Pay the debt.
- Appoint a voluntary administrator.
- Appoint a small business restructuring practitioner.
- Appoint a liquidator (i.e. the company begins to be wound up).
If the director fails to do one of these things within 21 days of the DPN being issued, the director penalty permanently locks down on the director (i.e. becomes a lockdown director penalty), and the ATO can commence proceedings to recover the debt.
Lockdown director penalty
A DPN will be issued for a lockdown director penalty where the relevant obligations are unpaid and the company has failed to report the debt to the ATO within the timeframes stipulated above.
A lockdown DPN penalty has permanently locked down on the director due to the failure to report the debt within the required timeframes, and the only way to remit (i.e. cancel) the penalty is to pay the debt in full.
In answering the three questions posed at the beginning of this article:
1. How to work out if a DPN is for a lockdown or non-lockdown director penalty?
For a non-lockdown DPN, the director's liability will be the company's unpaid tax obligations from lodgments made:
- for PAYG withholding and GST, within three months of the due date for lodgment for BAS and IAS; and
- for superannuation, the due date for lodgment of the SGC statement.
For a lockdown DPN, the director's liability will be the company's unpaid obligations for lodgments made after the above timeframes.
A director's personal liability for non-lockdown and/or lockdown director penalties can be calculated by using the company's:
- Integrated Client Account (ICA) and if applicable, the SGC account
- lodgment history.
These determine the company's unpaid tax obligations from lodgments made within or outside the timeframe stipulated above.
2. How to know if a DPN has been issued?
The ATO will issue a DPN to the director's personal address registered with the Australian Securities and Investments Commission (ASIC). The date the ATO posts the DPN is the date the notice is given to the director (i.e. the 21 days starts from the date on the DPN). The ATO is not required to show that the director actually received the DPN.
It is obviously critically important for directors to keep their address current with ASIC given:
- The ATO may commence action against a director to recover the director penalty 21 days after the DPN is issued, if the DPN is not complied with.
- For a non-lockdown DPN only, the director has a final opportunity to remit their personal liability within 21 days of the DPN being issued.
3. What happens when the 21 days is up for a DPN?
If the DPN is not complied with, after the 21 days, the Commissioner may commence action against the director to recover the director penalty.
Recently we have seen examples of the ATO taking action for director penalties that date back more than 10 years, and where the company has already been liquidated.
Footnotes
i From 1 April 2020.
ii From 30 June 2012.
iii For the March 2019 quarter and earlier, the lodgment timeframe is three months from the due date for lodgment of the SGC statement (therefore 4 months and 28 days after the end of the relevant quarter).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
