Tax Alert // Director Penalty Notice Regime

Recently the Government passed legislation to include Goods and Services Tax (‘GST’), wine equalisation tax (‘WET’) and luxury car tax (‘LCT’) in the Director Penalty Notice Regime (‘DPN’). This comes into effect on 1 April 2020, and the addition of GST is a
serious extension to directors’ liabilities and risks.

The amended legislation gives the ATO new powers to pursue GST/WET/LCT but it can only chase these debts incurred in the period starting 1 April 2020 or later with a DPN.

What is a DPN and why does it matter

Under existing rules, if a company does not meet its pay as you go withholding (‘PAYG’) or superannuation guarantee charge (‘SGC’) obligations, the ATO can recover these amounts from you personally as a director of the company.

A DPN applies to a director in their personal capacity and gives the ATO the power to pursue company directors for any unpaid/unreported PAYG and SGC liabilities. With the addition of GST, the ATO will now be able to pursue company directors personally for the majority of a company’s tax debts.

How does the DPN regime operate in practice

If a company has unpaid/unreported tax debts, the ATO can issue an estimated assessment for the amounts it considers are due. If the assessed amount is not paid by the due date, the ATO can issue DPNs to the company directors who then have 21 days to pay the tax due as a personal penalty.

The DPN must state the ATO’s estimate of the unpaid tax and remission options available to the director which depends on if the tax has been reported or not under the ‘lockdown’ rules. Any action by a director under the remission options must take place within 21 days of the date of issue of the DPN.

If the tax has been reported then the following remission options are available to an individual director:

Through illness or other good reasons the director was not responsible for the management of the company
The company, or another party, pays the outstanding amount
An administrator has been appointed
The company has been placed into liquidation

The current lockdown rules state that if PAYG was reported more than 3 months after the due reporting date (or not at all) then the DPN is ‘Locked Down’ which means placing the company into administration or liquidation will not remove the penalty.

It is important to note that the ATO will issues DPNs to all the company directors, not just those responsible for administration of the company’s accounting and tax systems.

Recovery options available to the ATO include:

Garnishee notices
offsetting tax refunds against the penalty
legal proceedings to recover the penalty

Increased risks for acting as a company director

In today’s environment it is vital that directors pay close attention to their company’s tax reporting, compliance and payment obligations. Where companies are more complex due to size and/or multi-site operation, individual directors may not have direct oversight of the company’s tax compliance obligations.

The potential consequences and risks of non-compliance must be understood by all directors who need to be aware of the DPN regime and its extension to GST.

New directors should also be vigilant too. A newly appointed director can be held personally liable for all historical SGC, PAYG and GST liabilities if they remain unpaid and unreported within 3 months or more after the date of appointment. Alternatively, if within 30 days of your appointment the company carries out one of the remission options above you may avoid liability.

Before accepting an appointment, new directors should take the necessary steps to ensure their prospective companies’ SGC, PAYG and GST obligations are up-to-date.

It is also important for all directors to update their personal details with the Australian Securities and Investment Commission (“ASIC”) to ensure they receive DPN as soon as possible. Remember directors only have 21 days from the date a Director Penalty Notice is issued, not received, to act and avoid personal liability.

Our specialists insights will meet all your tax advisory needs.

Your Bentleys tax experts:

Colin Chirgwin, Director
Darren Lee, Tax Director
Tim Lyford, Tax Director
Michael Senchenko, Client Director