Personal liability and the New Rules for Company Directors
- Director Penalty Notices (DPN's) are legal notices issued by the Australian Taxation Office (ATO) to company directors who have failed to meet their obligations under certain tax laws. The purpose of a DPN is to encourage directors to ensure their company meets its tax obligations, and to provide a mechanism for the ATO to collect outstanding tax debts from companies that have failed to pay.
What are Director Penalty Notices (DPNs)?
Two types of DPNs can make directors personally liable for unpaid PAYG, GST, and Superannuation, and these can broadly be described in two ways.
1. Non-Lockdown DPN's
These are issued when a company has reported its tax debts within three months of the due date for lodgement but has failed to pay those debts. Under a non-lockdown DPN, the director has 21 days to take action to avoid personal liability for the debt.
The options are:
- Pay the debt in full
- Place the company into liquidation
- Place the company into voluntary administration
- Appoint a small business restructuring practitioner
2. The 21-Day Lockdown DPN's
These are issued when a company has failed to report its tax debts within three months of the due date for lodgement. Under a lockdown DPN, the director becomes personally liable for the debt immediately upon the issue of the notice and has no ability to avoid that liability.
Do nothing?
If a director receives a DPN and fails to act within the specified time frame, they become personally liable for the unpaid tax debt of the company. This means that the ATO can take legal action to recover the debt, including issuing a court order to seize assets, garnishing wages, or even bankruptcy proceedings.
The ramifications of receiving a DPN can be serious for directors.
- They may face personal financial hardship, damage to their reputation, and even disqualification from being a director.
- A director who receives a DPN may be required to disclose that fact when applying for credit or entering other financial arrangements.
It is important for directors to understand their obligations under tax laws and to take prompt action to address any outstanding tax debts.
Available actions
- Paying the debt could be an obvious solution however this could be easier said than done. Particularly if the company is having cash flow difficulties or if there is a viability issue.
Further, the director may escape personal liability for the debt if the company appoints a liquidator or an administrator within 21 days.
Alternatively, you might place your company into voluntary administration or liquidation. In that case, you can only avoid liability if the amounts were reported and lodged within three months of the due date.
