Director Penalty Notices

As of July 2012, the Australian Taxation Office (“ATO”) made important changes to the Director Penalty Notice (“DPN”) regime which has no doubt increased the liability of Companies and personal exposure of their directors.  The changes were introduced to ensure that Companies are complying with the reporting and remittance of their PAYG and superannuation obligations.

In the past 12 months, we have noticed an increase in activity by the ATO, resulting in firmer action against Directors’.   A director typically receives a notice for a Company’s debt under the ATO’s firmer action approach (called a firmer action notice) when the Company:

1. Chooses to ignore notices despite repeated attempts by the ATO to make contact;
2. Repeatedly defaults on existing payment arrangements;
3. The debt is increasing and there is no evidence that ongoing tax obligations will be met;
4. Has been subject to an audit where deliberate avoidance was detected;
5. Is continuing to operate the business and there is evidence of “phoenix activity”

To avoid receiving a notice of firmer action, directors should make enquiries to the ATO as to whether there are any returns that haven’t been lodged, BAS’s, Superannuation Guarantee Charges, or PAYG liability.

As the new DPN regime applies retrospectively towards PAYG withholding, even if the director has placed the company into voluntary administration or Liquidation, the director may still receive a firmer action notice from the ATO.  Director penalties are discretionally enforced by the ATO.  A firmer action notice may escalate the threat to enforce the DPN provisions.

In this instance, the director should consult their legal advisor with respect to contacting the ATO with a view to proposing a repayment arrangement.  The ATO has the power to proceed with actioning the DPN and commencing Bankruptcy proceedings.

What to do
Your clients should ensure that they lodge any outstanding BAS and PAYG returns as soon as possible.  If a BAS return is lodged but PAYG is not paid, the ATO is within its’ rights to issue a DPN.  The notice period is 21 days and at the end of the period if the debt is not paid, personal liability can attach to the director.  

The director can avoid personal liability if the Company is placed into either Voluntary Administration or Liquidation prior to the expiration of the DPN (i.e. 21 days).

If unpaid PAYG is not reported within 3 months of the due date, the Director will automatically be personally liable for any unpaid amounts, even if the company is placed into external administration after this date.


Conclusion
It is evident that the ATO is able to override the “corporate veil” and apply personal liability to the company director should the above lodgements not be met.

The importance of communicating with the ATO and keeping them “in the loop” with the progress of ATO liabilities is paramount.  Where it was the case Directors could hide behind the corporate veil to minimise their personal liability, the ATO is clearly looking at pursuing Directors’ in a personal capacity to assist in recovering tax liabilities owed by Companies.

It is imperative that your client be aware of their Companies financial position at all times including liabilities to the ATO and lodgments.

The ATO is under increasing pressure to recover outstanding tax liabilities and it is our view that this will be a focus for them in the coming quarters.

Should your client require any further advice with respect to the DPN regime or changes to same, please feel free to contact this office.