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The Director Penalty Regime

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The Director Penalty Regime

Directors Beware – the corporate veil is not as it once was

The Australian Taxation Office (ATO) introduced the Director Penalty Regime to have the power to make company directors personally liable for certain unpaid company taxation debts. We feel company directors must understand the regime and its operation to ensure they take the necessary steps to avoid personal liability. In this article, we explain what you need to know about Director Penalty Notices (DPN) and what you need to do to avoid becoming personally liable for your company’s debts.

As a company director, you have a legal responsibility to ensure your company meets its corporate governance obligations which include lodging and paying Pay As You Go (PAYG) withholding, Goods and Services Tax (GST), and Superannuation Guarantee (SG) amounts on time.  If a company fails to do so, a director becomes personally liable for the unpaid amount to recover a company’s unpaid PAYG, GST or SG on receipt of a DPN.  

As we know, a company must:

  • Lodge and pay PAYG and GST to the ATO by the due dates.
  • Lodge and pay Business Activity Statements (BAS) with the ATO each quarter reporting PAYG and GST payable.
  • Pay superannuation by the due dates.
  • If the company doesn’t pay superannuation by due dates, it must lodge a Superannuation Guarantee Charge Statement (SGC Statement) with the ATO by the SGC Statement due date.

In the case that a company doesn’t pay PAYG, GST or superannuation, but lodges its Business Activity Statement within 3 months of being due and SGC Statements when due, the ATO can issue the company’s director with a Non-Lockdown Director Penalty Notice.

The director is then personally liable for the unpaid PAYG Tax, GST or superannuation claimed. 

Directors can avoid personal liability if:

  • The company’s PAYG, GST or superannuation is paid; or
  • The company is placed in liquidation or voluntary administration within 21 days of the date of the DPN.
Further penalties to avoid under the Director Penalty Regime

Lock-Down Director Penalty Notices apply when a company doesn’t pay PAYG, GST or superannuation and doesn’t lodge a Business Activity Statement within 3 months of being due or SGC Statements by required dates.  If this occurs the directors are automatically liable for PAYG, GST or superannuation. In this case, the ATO can:

  • Issue a DPN to recover unpaid PAYG, GST or Superannuation.
  • Issue DPNs after a company is already in liquidation or voluntary administration. Placing the company in liquidation or voluntary administration does not avoid liability.
  • Estimate a company’s debts for PAYG, GST and superannuation. After estimating the debts, the ATO will issue a DPN based on estimates.
What it means to be deemed personally liable?

If you become liable under a Director Penalty Notice the ATO will treat the debt as it would treat any ordinary tax debt. The ATO can and will:

  • Commence legal proceedings against you to obtain a judgment for the amount of the debt.
  • Use the Judgment to issue a Bankruptcy Notice and then subsequently make you bankrupt.
  • Garnishee funds from your personal bank account or from your wages.

For a company with multiple directors, the ATO will target its recovery action at the director it considers has the best ability to pay. The ATO will have information on a director’s personal financial position based on the director’s past Income Tax Returns.

Additionally, the ATO can issue a DPN to a director who was previously a director at the time the unpaid PAYG or superannuation was incurred. It does not matter if that director has subsequently resigned. The ATO can also issue a DPN to an incoming new director. 

If you become liable under a DPN we suggest taking the following actions:

  • Arrange to meet with us as a matter of urgency!
  • Negotiate a personal payment arrangement with the ATO for the director penalty debt. We can assist.
Tips to avoid liability under the Director Penalty Regime
  • Lodge BAS and SGC Statements on time or within the timeframes below.  If lodgments are made but tax debts are not paid you still have 21 days from the date of a DPN to place a company in liquidation or voluntary administration to avoid liability.
  • Make sure your postal address up to date in records maintained by ASIC.  DPNs are issued to your personal address as recorded with ASIC.  Not receiving a notice due to a change of address is not a defence to a claim by the ATO.
  • If a liquidator or administrator is to be appointed, the time to make an appointment is within 21 days of the date of the DPN.
  • If you receive a DPN, please call please call us immediately.
Dates for lodgement of SGC Statements for the directors to avoid being automatically liable.

Given the serious consequences a DPN may have on your position, it is important that you obtain advice promptly. Especially if your company is unable to pay PAYG, GST or superannuation.

The introduction of Lock-Down DPNs means that reporting of taxation debts to the ATO is more important than ever. The seriousness of a Lock-Down DPN is motivation for all company directors to report tax debts to the ATO on time, regardless of whether they can pay the debts being reported. Once the hard deadline of the Due Date has passed, there is nothing a company director can do to avoid personal liability.

For more information on DPNs, please contact the q4 team. You may also choose to review the details on the ATO’s website. In the event you have received a DPN or your company is unable to meet its requirements, contact us immediately. We can quantify and advise you of the risks associated with continuing to operate your company.

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