Directors Penalty Notices (“DPN”)
Company directors should take heed of their own personal liability when their company fails to remit certain amounts to the Commissioner of Taxation.
Directors will ordinarily become personally liable when a company fails to remit (amongst other items) amounts withheld under the PAYG withholding system, PAYE deductions and other amounts due under the PAYG withholding systems.
Every director has a statutory duty to ensure that the company complies with its statutory duties in respect to tax obligations. If the company fails to remit any payments the director runs the risk of becoming personally liable for the companies failure to remit.
The Commissioner will first make a formal demand on the company by issuing a notice demanding payment of the outstanding taxes within 14 days from the date of the notice.
If the company fails to comply with the notice, at the Commissioners discretion a further notice may be served pursuant to section 222AOE or 222APE of the Income Tax Assessment Act.
Importantly, the penalty provisions also apply to new directors where, 14 days after they become directors, the company has still not done one of the 4 steps noted below.
After service of the DPN (which is required to be sent via ordinary mail to the last recorded residential address on the ASIC database) the director is faced with four options. These are:
- Pay the amount in the demand;
- Make a payment arrangement with the Commissioner;
- Place the company into voluntary administration; or
- Into liquidation.
If the director tries to negotiate a payment arrangement with the Commissioner the company will be required by the Commissioner to first lodge all BAS and PAYG returns in order for the Commissioner to assess the full indebtedness of the company.
The 14 day notice period is a very short window of time during which directors can take steps to avoid personal liabilities and recovery proceedings. Unless the company can remit all the returns in a timely manner and before the expiration of the DPN the director runs the risk of not negotiating a successful payment arrangement before the 14 days is up. In this case, the director would have become personally liable for the companies tax liabilities.
The director must have a written agreement with the Commissioner within 14 days from the date of the DPN. Initiating discussions and putting forward a proposal is not sufficient enough to avoid the personal liability.
In most cases DPN notices are large and may result in the director having to declare bankruptcy.
Two defences are available where recovery proceedings are subsequently instituted against a director.
- Where, due to illness or some other good reason, the director did not take part in the management of the company during the period when the directors were under the duties described above; or
- Where the director took all reasonable steps to ensure that the duties were complied with, or there were no such steps that could have been taken.
Recent case law demonstrates that these defences can be very difficult to substantiate, as the period of time during which directors need to show that they were (for good reason) absent from their role, or took all reasonable steps, will often be many months if not years.
Although a director is entitled to be indemnified by the company for any payment made by way of penalty under these provisions, in practice the company will often have defaulted on its obligations to remit because of a shortage of funds.
Furthermore, any payments paid by the company to the Commissioner prior to the 6 month relationship back date period may be deemed to be a preference payment in the event that the company falls into the hands of a liquidator. This is still the case even if the director places the company into voluntary administration as required by the DPN.
However, the Commissioner is afforded by law and indemnity by the director of the company and accordingly the director will be required to reimburse the Commissioner office for their loss.
All directors, whether working or non-working, must ensure they stay completely abreast of the company's affairs and must ensure the company meets all of its taxation obligations at all times. If you receive a DPN , you should seek professional advice and act immediately.