Changes To Director Penalty Notices - No More Lay‐bys For Directors

The Australian Tax Office (ATO) has made some important changes to the Director’s Penalty Notice (DPN) regime.

There are two types of DPNs that can be issued by the ATO to a director – a Lockdown DPN, and a Non-Lockdown DPN.

The change removes the ability to comply with a Non-Lockdown DPN by entering into a payment arrangement, and will likely result in more companies being placed into external administration.

The DPN Regime   

The DPN regime provides a mechanism whereby directors can become personally liable for a penalty equal to the value of certain specified tax obligations if those obligations are not paid by the company when due.

The key tax obligations are the obligations in relation to Superannuation Guarantee Charges (SGC), Pay‐As‐You‐Go (PAYG) withholding liabilities and Goods and Services Taxes (GST).

As soon as the due date for lodgement and payment for these obligations has passed, the ATO can issue a DPN to the directors.

A DPN is a formal notice which:

  • notifies the recipient director that the specific tax obligation has not been met by the company;
  • notifies the director that as a result of this failure, they have (or may) become personally liable for those debts and are (or may become) liable to pay a penalty to the ATO in an amount equal to the amount of the debts;
  • notifies the directors of the ways in which they can comply with the DPN; and
  • provides 21 days’ notice of the ATO’s intention to commence proceedings to recover the debts if the DPN is not complied with. 

The ATO must issue a DPN to the directors before it is able to pursue the directors for the relevant penalty. 

If a director does not comply with a DPN, the ATO can issue proceedings against the director.  The only grounds on which a director can defend a DPN are:

  • the director did not take part, and it would be unreasonable to expect the director to take part, in the management of the company at the relevant times due to ill health or some other good reason;
  • the director took all reasonable and available steps to ensure that the company complied with its obligations; or
  • for SGC liabilities only – the company took reasonable care in applying the law in respect of its SGC liabilities in a way that was “reasonably arguable”.

Types of DPN Notices and the change in approach by the ATO

As noted above, there are two types of DPN that can be issued by the ATO to a director – a Lockdown DPN, and a Non-Lockdown DPN.

A Lockdown DPN may be issued where a company has not lodged its BAS or SGC statements in time and has not paid the amounts due.  The director becomes immediately personally liable for the penalty as soon as the Lockdown DPN is served on the director.  The only way for a director to comply with a Lockdown DPN is to cause the company to pay the underlying debt or to pay the director penalty.  This position has not changed.

A Non-Lockdown DPN may be issued where the company has lodged its BAS or SGC statements in time but has not paid the amounts due.  The director then has 21 days to implement one of the options set out in the Non-Lockdown DPN in order to avoid personal liability.

Prior to the COVID-19 pandemic, Non-Lockdown DPNs provided directors with four options:

  • the company pays the underlying tax debt (or the liability is discharged by the director paying the penalty);
  • the company is placed into administration;
  • the company is placed into liquidation; or
  • the company enters into a payment arrangement under section 255-15 in Schedule 1 to the Taxation Administration Act 1953 (Cth) (Payment Arrangement). 

During the COVID-19 pandemic, the ATO suspended the DPN program as part of the suite of support initiatives put in place by the government to deal with the impact of the pandemic.

The ATO then published a notice informing the market that it would be recommencing certain tax collection activities in March 2022, including in relation to issuing DPNs.

Non-Lockdown DPNs issued since that time have set out the following four options:

  • the company pays the underlying tax debt (or the liability is discharged by the director paying the penalty);
  • the company is placed into administration;
  • the company is placed into liquidation; or
  • the company appoints a small business restructuring practitioner (SBRP).

The key changes are that:

  • directors of qualifying businesses can now avoid personal liability under a Non-Lockdown DPN by appointing a SBRP; and
  • the option to avoid personal liability by causing the company to enter into a Payment Arrangement has been removed.

Lavan comment

Although the impact of these changes is yet to be seen, it appears that the removal of the Payment Arrangement option will mean that directors who receive a Non-Lockdown DPN will be more likely to place the company into administration or liquidation unless they can find funding or some other option to allow the company to pay the underlying tax obligations.

This has significant implications for directors, insolvency practitioners, and parties who might be interested in providing targeted funding solutions to assist companies having difficulty in meeting their relevant tax obligations.

If you have any questions about the DPN regime, the changes to Non-Lockdown DPNs, or how to respond to a DPN, the experienced Lavan team is here to help.