As the Australian Taxation Office (ATO) sharpens its focus on debt recovery, directors find themselves navigating a minefield of obligations and penalties.
As the Australian Taxation Office (ATO) sharpens its focus on debt recovery, directors find themselves navigating a minefield of obligations and penalties.
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A Director Penalty Notice (DPN) is a powerful debt recovery enforcement tool available to the ATO to compel a business’s compliance with its tax obligations. It is issued under Div. 269, Sch. 1 of the Taxation Administration Act 1953 (Cth) and serves as a formal notice to the directors of a company if the company has failed to meet certain reporting obligations and payments.
Personal Liability is where a company’s debt is made to be the directors personal debt.
These include disqualification, fines up to $200,000, and may lead to criminal prosecution.
Creditors can only take action against directors for their own debts whereas a liquidator can on behalf of all creditors.
A holding company can also be liable for the debts of a subsidiary if it allows the subsidiary to trade while insolvent.
Traditional Notice (Non-Lockdown DPNs)
When a company has outstanding PAYG or SGC liabilities, a director may be issued a 21-day DPN by the ATO. Upon receipt of the DPN, the director has a 21-day window to take action to prevent personal liability. The director can:
> Pay off the debt
> Place the company into liquidation or voluntary administration;
> Appoint a small business restructuring practitioner such as AVA Advisory, a specialist debt management adviser in Sydney. Only an option for companies with a total debt less than $1 million and super paid and up to date; or
> Begin the process of winding up the company.
Begin the process of winding up the company.
These are issued when a company fails to report its PAYG withholding or SGC liability by the due date. In this case, the director becomes personally liable for the penalty immediately.
In essence, the key difference lies in the company’s reporting status and the director’s options for avoiding personal liability. With a Lockdown DPN, the director’s liability is immediate, while with a Traditional Notice/Non-Lockdown DPN, the director has some options to avoid personal liability.
> Personal Liability: Under a DPN, directors can become personally liable for the company’s unpaid tax liabilities. This means that the ATO can recover the unpaid amounts directly from the director and the director’s assets. For example, if a company fails to pay its PAYG withholding tax, the ATO can issue a DPN to the directors, making them personally liable for the unpaid amount.
> Legal Action: If the director fails to pay the debt or appoint an administrator or liquidator to wind up the company within twenty-one (21) days of receiving a DPN, the ATO may commence legal actions against the director. This could include court proceedings to recover the debt.
> Credit Score Impact: A DPN can also affect the director’s credit score. This could make it more difficult for the director to obtain credit in the future.
> Business Reputation: The business’ reputation may be negatively impacted by the issuance of a DPN. This could affect your business relationships with suppliers, customers, and other key stakeholders.
> Garnishee Notice: In addition to a DPN, the ATO can also issue a garnishee notice to recover unpaid tax debts. A garnishee notice is a legal notice that allows the ATO to recover tax debts from a third party who holds money for or owes money to the taxpayer.
Whether it’s due to unexpected challenges, market fluctuations, or other factors, many businesses encounter periods of financial strain. AVA Advisory specialises in supporting businesses like yours through these tough times. We offer strategic insights, financial expertise, and a pathway to overcome business debt challenges, putting you back on the road to success.
AVA Advisory provides clear guidance on Directors Penalty Notice’s and resolution strategies tailored to your situation. With the right advice, directors can avoid personal liability and find the best path forward. Seek expert advice on your Directors’ Duties and options if you think your debts are becoming increasingly harder to manage.
Connect with AVA Advisory today for a lifeline. Let’s work together to calm the financial storm of uncertainty around ATO debt and set sail towards a brighter future for you and your business. Don’t delay – let us help you get through it all, not just for your sake – but also for those you care about the most. Book an obligation-free, cost-free consultation or call 1300 181 220 to discuss your options in confidence.
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