The Australian Taxation Office (ATO) has always had several techniques to collect outstanding tax debts. Recently there has been a strengthening of the ATO’s powers where a company fails to comply with its obligations, particularly in relation to employee entitlements. These powers allow the ATO to issue Director Penalty Notices (DPNs) on a company director to make them personally liable for any outstanding PAYG Withholding and Super Guarantee (SG) obligations of the company. The legislation acts retrospectively and allows the ATO to seek payment for debts that remain unpaid and unreported from 29 June 2012.
What is a DPN?
DPNs are a penalty notice issued to a company director where the company has failed to meet its obligations in relation to PAYG Withholding and SG. The DPN makes the director personally liable for the company’s debts without the need for imposing legal action on the company.
The primary purpose of DPNs is to change the behaviours of directors by ensuring lodgements are up to date and take action where a debt is unable to be paid (previously tax debts and superannuation obligations were left to the bottom of the payments pile).
The introduction of Single Touch Payroll and Super Stream has made PAYG Withholding and superannuation information available to the ATO faster than ever before and allows them to act quickly to recover the outstanding obligation.
When do they apply?
The DPN regime makes the director personally liable to a penalty at the end of the day the company is due to meet its obligations. The penalty is automatic as soon as the debt is not paid by the due date. But before director penalties can be recovered from a director personally, the ATO must first issue a DPN outlining the unpaid amounts and remission options available.
The ATO must not commence proceedings to recover the director penalty until 21 days after the DPN is issued to the director. Therefore, it gives the director 21 days to act and seek advice if needed. Please note, the 21 day period starts from the date the letter is sent by the ATO not the date that you receive it. During this time, there are options available to get the penalty remitted.
If PAYG Withholding and SG amounts remain unpaid and unreported 3 months after the due date of lodgement, the penalty cannot be remitted, and the only option left is to pay the debt.
Can the ATO estimate the liability?
Yes, if the company fails to report PAYG Withholding and SG obligations by the due date, the ATO may make a reasonable estimate of the unpaid and overdue amount.
Are there any defences against a DPN?
The DPN regime provides several defences and circumstances for when a director will not be personally liable for the debt. This will apply where the director can establish that:
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 because of illness or for some other good reason.
The director took all reasonable steps, unless there were no reasonable steps the director could have taken, to ensure that one of the following three things happened:
The company paid the amount outstanding
An administrator was appointed for the company
The directors began winding up the company
In the case of unpaid SG liability - the company treated the SGC Act as applying in a way that could be reasonably argued was in accordance with the law and took reasonable care in applying the Act.
How to avoid a DPN?
The most effective action to avoid a DPN is prevention. Here are a few simple steps you can take:
Ensure that monthly and/or quarterly BAS returns are lodged on time;
Increase monitoring and awareness of superannuation liabilities;
Act promptly where problems arise and seek advice from your accountant, lawyer or insolvency practitioner, if the company is unable to pay the amounts due for PAYG Withholding and SG;
Make sure your address details are up to date with ASIC and the ATO.
If you need any help getting your PAYG Withholding and superannuation obligations in order, or have any questions about this, please do not hesitate to contact us or call us on (07) 3425 1115.
General Advice Warning – The information in this article is educational and general in nature. It does not take into consideration your personal financial or taxation information, goals and objectives. Please ensure you seek appropriate financial and taxation advice.
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