What To Do If You’ve Received A Director Penalty Notice (DPN) from the ATO: A Guide for Small and Medium Australian Business Owners.

In an unfortunate turn of events, small Australian businesses are struggling after corporate collapses caused a sudden economic change. The increase in insolvencies is causing concerns in communities, as shop owners face financial uncertainty.
director penalty notice

Introduction

In the ever-evolving landscape of Australian business in an uncertain global economic environment, the spectre of insolvency looms large. The rules of the game are changing, and the stakes have never been higher. As the Australian Taxation Office (ATO) sharpens its focus on debt recovery, directors find themselves navigating a minefield of obligations and penalties. At the heart of this new reality is the Director Penalty Notice (DPN), a tool that has become synonymous with personal liability for company debts.

This article aims to demystify DPNs, shedding light on their implications, the obligations that trigger them, and the defences available to directors. It’s time to arm yourself with knowledge and take control of your company’s future. Welcome to your guide on the rise in Director Penalty Notices.

ATO action up to 538%

According to The Australian, the ATO issued 23,389 penalty notifications to directors for PAYG Tax, GST and Superannuation Payments in FY22-23,up from only 4,632  penalty notices the previous financial year. This represents 538% increase year on year in ATO actions against Australian businesses, and the directors who own and run those businesses are liable for those debts

What is a Director Penalty Notice (DPN)?

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.

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The reporting obligations that can trigger a DPN include:

1.Pay As You Go (PAYG) Withholding: This is the tax withheld from payments made to employees and other businesses. If a company fails to withhold this tax or report and pay it to the ATO, a DPN can be issued.

2.Superannuation Guarantee Charge (SGC): This is the contribution employers make to their employees’ superannuation funds. If a company fails to meet its SGC obligations, a DPN can be issued.

3.Goods and Services Tax (GST): If a company fails to report and pay its GST obligations, a DPN can be issued.

Failure to comply with these obligations can result in the ATO issuing a DPN to the directors of the company, making them personally liable for the penalty.

Types of DPNs

There are two types of DPNs: “Traditional (Non-Lockdown) DPNs” and “Lockdown DPNs”.

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); or

–  Begin the process of winding up the company.

In addition, a director can also negotiate a payment plan with the ATO for the company to settle its tax debts. While this arrangement does not absolve the director of personal liability for the debt, the ATO is less likely to pursue an individual director for such debts if a payment plan is actively being adhered to. This is a recent shift in policy, as directors were previously able to avoid personal liability by entering into a payment arrangement with the ATO.

Moreover, a director can avoid personal liability for the debt if the company appoints a liquidator or an administrator within the 21-day period. Alternatively, the director might opt to place the company into voluntary administration or liquidation. However, in such cases, liability can only be avoided if the amounts were reported and lodged within three months of the due date.

Lockdown DPNs

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.

Examples

Let’s consider a few examples:

Example 1: Company A fails to report its PAYG withholding liability for the March quarter by the due date. The ATO can issue a Lockdown DPN to the directors of Company A, making them personally liable for the penalty.

Example 2: Company B reports its SGC liability for the June quarter but fails to pay it. The ATO can issue a Non-Lockdown DPN to the directors of Company B. The directors can avoid personal liability by ensuring the company pays the debt, or by appointing an administrator or liquidator within 21 days of receiving the notice.

Speak to a specialist if you have received a DPN

Understanding DPN is crucial for company directors. Non compliance can lead to significant penalties including personal liability.Therefore it’s important for directors to ensure their company meets its tax reporting obligations on time by contacting a DPN response adviser in Sydney

Implications for Directors

The implications for directors who fail to ensure their company’s tax and super obligations are reported and paid on time can be severe. The ATO can issue a DPN, which can result in personal liability for the director.

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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.

Tax and super obligations

It’s crucial for the director to ensure their company’s tax and super obligations are reported and paid on time to avoid  these serious implications

Possible defences against a DPN

Defending against a DPN can be complex, but there are a few statutory defences that may be available. These include illness or other circumstances, no reasonable steps available, and reasonable attempt to comply.

Raising defences against a DPN requires immediate action and a well-structured approach.

1.  Understand the notice: First, thoroughly understand the DPN and the implications it carries.

2. Seek professional advice: It’s crucial to seek advice from an insolvency professional as soon as you receive a DPN. Insolvency Accountants, Lawyers, and other practitioners can provide guidance on the rights, obligations of directors, and possible defences.

3. Prepare your defence: Based on the advice, prepare your defence. There are limited defences available, so use them wisely. You may also find other grounds to defend yourself, which will be specific to your situation.

4. Submit your defence: Defences to a DPN can be raised within sixty (60) days of notification. Penalties may not apply if the Commissioner of Taxation is satisfied required information is satisfactory, that it has been supplied in a timely fashion, and that the circumstances of the director concerned equate to one of three statutory defences.

Seeking Professional Advice

How a Debt Management Adviser Can Help You With A DPN Response.

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If a director is issued with a DPN, it is crucial to seek professional advice from a professional debt management advisory firm with experience dealing with DPNs, as soon as possible (as every day counts).

A debt management advisory firm specialising in insolvency can provide crucial assistance to a director who has received a DPN in several ways. This includes reviewing the company’s financial position, providing advice on available options, providing guidance on external administration appointment options, and guiding you every step of the way through the process as a trusted adviser.

Debt management advisors (such as Sydney-headquartered AVA Advisory) and insolvency advisers specialise in providing advice to directors who have received a DPN or whose company is facing financial difficulties. As experienced DPN advisers in Sydney helping small to medium businesses facing financial difficulty, AVA Advisory offers a range of solutions, including finance, restructuring, and advisory services with a primary focus on insolvency.

The team at AVA Advisory can also guide you through the DPN process and help you navigate interaction with other insolvency professionals (such as insolvency lawyers) who can provide legal advice on the rights and obligations of directors in relation to your particular circumstances (in addition to possible defences to a DPN).

A debt management adviser can provide crucial DPN response advice in Sydney to a director who has received it in several ways:

1.  Reviewing the Company’s Financial Position: An insolvency specialist (also known as an “insolvency practitioner”) can conduct a thorough review of the company’s financial position. This includes assessing the company’s assets, liabilities, cash flow, and overall financial health

2. External Administration Appointment Options: In some cases, it may be beneficial to consider external administration. An insolvency practitioner can advise on the potential external administration appointment options available to the company.

3. Guidance Through the Process: An insolvency practitioner will guide the director correctly through the steps to ensure they do not face any other consequences.

Debt Management Adviser

What can a debt management adviser assist company directors and business owners with?

A professional debt management firm can consist of a multitude of experienced corporate advisory and insolvency professionals who can advise and act on behalf of individuals, partnerships, or companies that are experiencing financial hardship. Their role is complex and multifaceted and can encompass several key responsibilities:

1.  Oversight and Control: They can manage the insolvency process end-to-end. This includes closing down a business, restructuring a company (e.g. making recommendations on headcount or company structure) and dealing with creditors’ demands.

2. Providing Expert Debt Management Advice: They can advise saving a business or taking control of the company before winding it up. They are also well-placed to give pre-insolvency advice.

3. Assuming Various Roles: Depending on the case, an insolvency practitioner may assume various roles, such as a liquidator, voluntary administrator, receiver, or small business restructuring practitioner.

Professional advise from a specialist DPN adviser

Remember, every business situation is unique, and the best course of action depends on the specific circumstances of the company and the director.

It’s crucial to seek professional advice from specialist DPN adviser as soon as DPN is received. Having the knowledge and guidance from a DPN response professional in this complex and multifaceted field (which includes several responsibilities in the DPN response process) can provide you with the peace of mind that your situation is being handled with the utmost care and dilligence.

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