A reminder: Director Penalty Notices
"The recent increased use of DPNs by the ATO is a timely reminder to ensure that your clients remain up to date with their lodgement obligations."
Todd Kelly, Partner, Business Restructuring and Advisory
Long-time readers will already be aware of Director Penalty Notices (DPN) and how the Australian Taxation Office (ATO) can use these provisions to make directors of a company personally liable for the company’s outstanding Pay As You Go (PAYG) and Superannuation Guarantee Charge (SGC) liabilities, however, given we continue to see directors caught out, a recap is in order.
Under current legislation, a director of a company becomes liable to a penalty equal to the outstanding PAYG and SGC at the end of the day the company is due to meet its obligation. Note that this penalty is created automatically, the ATO is not required to take any action or issue any notices to create the penalty. However, the ATO cannot commence recovery against the director for the penalty until 21 days after a DPN has been issued. There are two types of DPNs which can be issued by the ATO, a non-lockdown DPN and a lockdown DPN.
This form of DPN is issued by the ATO to company directors where the company has lodged its business activity statements, instalment activity statements and/or superannuation guarantee statements within three months of their due date but where the PAYG and/or SGC amounts remains outstanding. Once issued, this type of notice gives the director 21 days to undertake one of three options - to place the company into liquidation, place the company into voluntary administration or to cause the outstanding debt to be paid in full. Providing the director actions one of the three options within 21 days of the date of the notice (not when it is actually received by the director) then the penalty is remitted (eg cancelled) and the director is not personally liable for same.
This form of DPN is issued by the ATO to company directors where the company has failed to lodge its business activity statements, instalment activity statements and/or superannuation guarantee statements within three months of their due date and where the PAYG and/or SGC amounts remains outstanding. Once issued, there is only one ‘out’ for a director to avoid personal liability and that is for the company, within 21 days of the notice, to cause the outstanding debt to be paid in full. That’s not much of an option!
It can therefore be very beneficial for directors to still lodge the returns on time even if they can’t make the payment. This is because if the company ultimately fails, or if the ATO issues a DPN, they can avoid the personal liability, which can often be substantial, by putting the company into liquidation or voluntary administration.
Whilst we often see BAS returns lodged on time, it is rare for us to see the SGC statement lodged on time, if at all. Directors are being caught out personally, sometimes years after the company has been liquidated when a DPN arrives ‘out of the blue’.
Tax agents are allowed an extra month to lodge a business activity statement electronically so, for companies that utilise the services of a tax agent to lodge their business activity statements, they enjoy the benefit of an extra month before the three month lockdown period starts counting down. The ATO can also vary the due date for the lodgement of business activity statements when they are lodged through the business activity statement agent portal. Where the ATO has varied the due date for lodgement, the three month lockdown period only begins counting down once that varied date has passed, rather than the original due date.
The future - extending the personal liability to include GST
The 2018 Federal Budget contained a number of changes which will impact the current DPN regime. While these measures are yet to formally commence, they should still be kept on your radar as they include:
- The prevention of directors from improperly back dating registration of director documents to circumvent prosecution or escape personal liability
- Limiting the ability of directors to resign from a company which would otherwise be left with no directors
- Extending the current DPN regime to include Goods and Services Tax, Luxury Car Tax and Wine Equalisation Tax.
Hughes as joint and several liquidators of Traditional Therapy Clinics Limited (In Liq)  WASC 139. In this case the Court was asked to consider an application by liquidators that their prior appointment as Voluntary Administrators was valid, even though two out of five of the company’s directors were not in a position to form a view on the company’s solvency. The details of this case were as follows:
- At the time the Voluntary Administrators were appointed there were five company directors, however two of these directors had only recently been appointed to the position of director
- As part of the appointment of the Voluntary Administrators the directors had to resolve that the company was, or was likely to become, insolvent
- Given two of the company’s directors had only recently assumed that position, they did not have sufficient knowledge or understanding of the company to form an opinion on the solvency of same
- The Voluntary Administrators were subsequently appointed as liquidators and, as liquidators, made application to Court pursuant to section 447C of the Corporations Act 2001 (Cth) for a declaration confirming their appointment as Voluntary Administrators
- The resolution appointing the Voluntary Administrators stated that “All of the directors voted in favour of the appointment of the administrators” which meant that two of the five directors had voted without being in a position to form a view on the solvency of the company as required by section 436A91)(a) of the Corporations Act 2001 (Cth), however the majority of the board of directors had
- The Australian Securities and Investments Commission opposed the Court making the section 477C order confirming the initial appointment on the basis that because two of the directors of the company had not formed the requisite opinion as to solvency of the company, but had still voted in favour of the resolution which appointed the Voluntary Administrators, this invalidated the resolution and therefore the appointment had not been properly made (ASIC’s position was that all of the directors had to hold the opinion as to insolvency)
- In this instance the Court considered the requirements of section 436A(1) and the objects of Part 5.3A of the Corporations Act 2001 (Cth) and determined that the Voluntary Administrators had been validly appointed to the company as: “the proper interpretation of the phrase ‘the opinion of directors voting for the resolution must mean the opinion of the majority. Resolutions of directors are passed by majority vote. It would be a strange outcome if a decision of the majority acting on a fully informed basis was vitiated by the actions of a minority.”
Please contact Todd Kelly, Mitchell Adkins or Benjamin Schierhuber should you have any questions regarding business restructuring or advisory matters. Please take us up on our offer of a free initial consultation.