Author: Mark Holland, Partner, McGrathNicol.
The Australian Taxation Office (‘ATO’) almost completely deferred debt collection action for two years due to COVID-19. Now, as economic activity returns to the “new normal”, it has recommenced enforcement activity for those taxpayers that have not engaged, are higher risk or have unpaid superannuation guarantee debts. A key development is the “lockdown” Director Penalty Notice (DPN), which is being sent to directors when lodgements are not up to date and tax is overdue. If a director receives a “lockdown” DPN, they must pay the tax within 21 days or face personal liability.
What are Director Penalty Notices?
Most unsecured creditors cannot recover debts from a director personally without a personal guarantee. An exception is the ATO – where directors can become personally liable for a penalty equal to the value of a company’s outstanding superannuation obligations, Pay-As-You-Go withholding tax (‘PAYG’) and Goods & Services Tax (‘GST’) obligations.
Before becoming personally liable for a company’s superannuation, PAYG and GST liabilities, the ATO must issue the directors with a DPN. There are two types of DPNs:
1. ”Non-lockdown” relating to when a company has lodged GST and PAYG statements within three months of the due date and has reported superannuation guarantee contributions by the due date, but the relevant liabilities have not been paid; or
2. “Lockdown” relating to when GST, PAYG and superannuation returns have not been lodged within the timeframes outlined above and the relevant liabilities have not been paid.
The options available to a director following receipt of a DPN
Directors have 21 days to respond to a DPN before becoming personally liable. Therefore, it is imperative that directors take immediate action following receipt to avoid putting personal assets at risk.
The options available to directors depend on the type of DPN issued.
Non lockdown
Following receipt of a “non-lockdown” DPN, directors must do one of the following within 21 days to avoid personal liability:
Pay the debt;
Appoint a voluntary administrator;
Appoint a small business restructuring practitioner; or
Appoint a liquidator to wind up the company.
The option to avoid personal liability by causing the company to enter into a payment arrangement is no longer available.
Lockdown
The only option available to directors to avoid personal liability following receipt of a “lockdown” DPN is to pay the debt. In the event of a “lockdown” DPN, the ATO will often estimate the tax liability.
Key strategies
Open lines of communication and engage early with the ATO (prior to a DPN being issued). The ATO’s preferred approach is to work with taxpayers to resolve outstanding tax liabilities through engagement rather than enforcement.
Ensure GST and PAYG statements are lodged within three months of the due date and superannuation guarantee statement submitted by the due date, irrespective of whether the company has funds to pay.
Act quickly if you receive a “non lockdown” DPN or risk becoming personally liable for your company’s debt. Either cause the company to pay the debt in full or seek help from a restructuring practitioner, who can explain the external administration options available.
If directors receive a “lockdown” DPN, then they must pay the debt within 21 days or face personal liability.
How can McGrathNicol help?
McGrathNicol works with directors and their advisors (accounting, financial and legal) to navigate periods of financial and operational challenge and distress, including dealing with major creditors. We partner with boards, management teams and financiers to quickly identify root causes, formulate turnaround strategies and implement value-maximising restructures.
Want to know more?
For further information please visit our website (www.mcgrathnicol.com) or contact Mark Holland at McGrathNicol by email (mholland@mcgrathnicol.com) or by phone (+61 410 758 244).
Disclaimer
This article contains information and comments which are general in nature and do not take account of the individual circumstances of any specific individual or entity. Strategies outlined in this article may not be relevant to the circumstances of every reader or every entity and are not guaranteed or warranted to produce or result in any particular outcomes. Relevant laws and regulations vary from jurisdiction to jurisdiction and from time to time. Readers are advised to seek independent legal, financial or other professional advice that is current and tailored to their individual circumstances and geographic location. No warranty is made as to the accuracy and completeness of the information contained in this article. Both the author and Survive in Business Pty Limited specifically disclaim any liability or responsibility for any loss, damage or risk incurred to any party as a direct or indirect consequence of the use, application or reliance upon any of the contents of this article.
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