Directors are often protected by corporate structures and cannot be personally liable for the debts accrued by the company. However, the ATO has the power to personally pursue the assets of directors if the company does not satisfy its debt obligations by way of a Director Penalty Notice (DPN). Here we’ll explain what Director Penalty Notices are and when they can be issued.
Director Penalty Notices (DPNs)
As a director, you are responsible for making sure your company meet its tax obligations. This includes paying the company’s debts and obligations when they fall due. Pursuant to the Income Tax Assessment Act 1936 (Cth), the ATO is given discretionary powers to make directors personally liable for two types of debts that a company incurs:
- Pay As You Go (PAYG) – Withholding tax which requires you to pay incremental amounts of your company’s income to the ATO.
- Superannuation Guarantee Charge (SGC) – This occurs when an employer fails to pay an employee their super. You will be given an SGC if you fail to do so.
A Director Penalty Notice is therefore a mechanism for the ATO to pierce the corporate veil. It allows the ATO to pursue you personally if your company does not meet its PAYG and SGC obligations.
Types of Director Penalty Notices
There are two types of Director Penalty Notice. The type which is applicable to you depends on whether you have lodged your PAYG and SGC debt obligations within 3 months of their due date.
Traditional DPN
If the answer is Yes and you have lodged the tax obligations but have not paid it, then you will be given a traditional DPN. The traditional DPN will give you 21 days to take actions to avoid personal liability. There are a few ways you can avoid this if the ATO issues you a traditional DPN. You can make the company pay the debt outstanding, put the company into liquidation or voluntary administration, or you can agree to a payment plan with the ATO.
Furthermore, the 21 day period starts from the date the ATO sends the letter and not when you receive it.
Lockdown DPN
If the answer is No and you have not lodged and paid the due amounts, then you are automatically personally liable. You will not be given the 21 day notice period. You also cannot rely on the mechanisms that allow you to avoid liability.
Final Thoughts
It is important that you pay your debt obligations when they are due. This prevents the ATO from personally pursuing your assets for repayment. Once issued a DPN, there is generally no avoidance measures besides compliance. However, you can avoid being issued a DPN by always being up-to-date with your company’s financial position. For further advice about director penalty notices, it may be wise to consult a business lawyer.
