Director penalty notice (DPN) is a notice that the Australian Taxation Office (ATO) can send a director for tax liabilities a company has failed to pay. A Director Penalty Notice is issued under the Taxation Administration Act 1953 (Cth) and requires a director address the outstanding liabilities in the Director Penalty Notice within twenty-one (21) days.
If the penalties are not paid or remitted within the twenty-one (21) day period, the director becomes personally liable for payment of the liabilities and the ATO can then commence proceedings to recover the outstanding tax from the director personally.
In order to avoid personal liability a director must, within the prescribed twenty-one (21) day period either:
- pay the amounts in the Director Penalty Notice; or
- remit the penalties.
Typically, remitting the penalties involves:
- causing the company to pay the unpaid amounts;
- appointing an administrator for the company; or
- placing the company into liquidation.
Occasionally, a DPN may only allow payment of the unpaid amounts as a means of remitting the penalties, these are called lockdown DPN's. DPN's that permit administration or liquidation as a form of remittal are known as non-lockdown DPN's.
A lockdown DPN means that unless the unpaid amounts are paid, the director becomes personally liable for the unpaid amounts.
A non-lockdown DPN means the director can avoid personal liability if the company is placed into administration or liquidation.
Issues can arise where a company is already in administration or liquidation and a director is issued a non-lockdown DPN; the director cannot cause the unpaid amounts to be paid or place the company into administration or liquidation because they no longer have control of the company.
Where a lockdown DPN is issued (and in some circumstances a non-lockdown DPN) and the director or company are unable to pay the unpaid amounts, it is imperative that you seek pre-appointment advice from both a lawyer and an insolvency practitioner or small business restructuring practitioner as soon as possible. Once the twenty-one (21) day period expires the director automatically becomes liable for the unpaid amounts under the DPN.
In addition to any restructuring measures there are some limited defences available to directors who have been issued a DPN under the Taxation Administration Act. Broadly, the defences are, at the time the unpaid amounts were incurred, the director:
- due to illness, was unable to properly manage the company;
- took all reasonable steps to cause the company to comply with its obligation; or
- there were no reasonable steps that could have been taken.
There are other factors relevant to a defence related to the appointment of a small business restructuring practitioner and unpaid superannuation amounts that are more properly described in section 269 – 35 to Schedule 1 of the Taxation Administration Act (the Act).
For most directors, a successful defence will hinge on that director establishing that they took all reasonable steps to cause the company to comply with its obligations. Because the defences under the Act are a fairly novel point of law, successfully establishing a defence, can be a technical and complex task that requires the assistance of a lawyer who specialises in insolvency, restructuring and DPN issues.
The insolvency team at Rostron Carlyle Rojas Lawyers are experienced in resolving and advising on DPN's and DPN related restructuring issues, including facilitating the engagement and appointment of a small business restructuring practitioner and/or an administrator or liquidator.
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.