Introduction
Changes are afoot in the Director Penalty Notice (DPN) regime, with potentially significant repercussions for all directors.
DPNs are a tool available to the Deputy Commissioner of the Australian Taxation Office (ATO) to enforce a personal liability against directors in respect of certain company taxation debts.
While the DPN regime has been in place for some time now, since 2012 there have been moves by the Government to increase the reach of DPNs, giving rise to a landscape for directors in which the risk of personal liability for corporate tax amounts has, and will continue to be, broadened.
Existing and new company directors should be proactively looking at their businesses to ensure these risks are identified and controlled.
Current regime - summary
Currently, the DPN regime imposes a duty on directors to cause the company to remit all pay as you go withholding (PAYG) amounts as well as all Superannuation Guarantee Contribution (SGC) amounts.
Enforcement of that duty is effected by the imposition of a penalty on directors of the company at the time the taxation liability falls due. The penalty is equal to the amount of the taxation liability payable by the company.
Before taking steps to enforce the penalty, the DPN regime requires that the directors of the company be given a “polite final reminder” of their duty to cause the company to remit withholding amounts. That reminder takes the form of a DPN served on the director identifying the relevant outstanding taxation amount(s).
Current regime – key concepts
- DPNs only apply to company tax liabilities arising from unpaid PAYG and SGC amounts.
- There are two types of DPN, being:
(1) ‘Ordinary’ DPNs, which relate to tax debts which are unpaid but have been reported to the ATO.
Save for very limited defences, personal liability can only be avoided if, within 21 days after service of the DPN, the director causes the company to do one of the following:
- appoint an administrator or liquidator;
- pay the whole of the outstanding amount; or
- enter into a payment plan.
(2) ‘Lockdown’ DPN, which relates to tax debts that are both unpaid and unreported within 3 months of the relevant ‘due date’. The due date for PAYG amounts is the relevant payment date, whereas for SGC amounts it is the last date for lodgement of a SGC Statement.
Save for very limited defences, personal liability can only be avoided if, within 21 days after service of the DPN, the directors cause the company to do one of the following:
- pay the whole of the outstanding amount; or
- enter into a payment plan.
- Enforcement of a director’s personal liability can only occur 21 days after service of a DPN. Service of the DPN is only required to be by delivery by post at the address for the director recorded with ASIC.
- The date of service is the date of the notice, not the date it is received, or the date it comes to the attention of the director.
- If a PAYG or SGC liability is not reported, the ATO can utilise an estimate regime to quantify the amount of the relevant liability. If unpaid, the liability then falls within the operation of the DPN regime.
Good to know – DPN traps for the unwary
- Entry into a payment plan in respect of a DPN amount only mitigates the personal liability so long as the payment plan is complied with. If the plan is not complied with, the remaining amount of the personal liability remains enforceable by the ATO.
- It is critical to ensure ASIC records are correct and updated, as an incorrect or out of date address is no defence to service of a DPN.
- ATO can issue Lockdown DPNs after a company has been placed into external administration or been wound up.
Signing on, or signing off – DPN due diligence is critical
- Incoming directors – become personally liable for all reported but unpaid PAYG and SGC amounts which pre-date appointment unless the debt is paid within 30 days after their appointment, and all such amounts which are unreported and unpaid within 3 months of appointment become a lockdown penalty.
- Outgoing directors – remain personally liable for unpaid PAYG and SGC amounts that were due before the date of resignation, as well as those which fell due after the date of resignation but (for PAYG) the first withholding event in the reporting period occurred prior to resignation or (for SGC) relate to the quarter ending before resignation
Proposed changes – lockdown penalty for all unpaid SGC amounts
Proposed amendments to the DPN regime relating to SGC amounts are presently before the Commonwealth Senate, in the form of the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018.
Once passed, the Bill will put into force amendments that result in all SGC amounts which are not paid by the relevant due date becoming subject to an immediate and automatic lockdown penalty. In short, the current three month ‘grace’ period for avoiding a lockdown penalty by reporting after the relevant due date will be removed.
In order to avoid a SGC amount becoming a lockdown penalty, directors will need to ensure that SGC statements are lodged on time (generally 1 month and 28 days after the end of the relevant quarter), even if the payment of the amount is not made on the due date.
Proposed changes – GST to be added to DPN regime
The 2018-2019 Budget announcements included several proposed policy changes as part of a suite of additional tools to be implemented to deter and disrupt phoenix activity. An exposure draft has been released by Treasury, and the consultation period recently closed. It is therefore anticipated that a formal Bill will be introduced to Parliament soon.
A key change proposed is the addition of GST, as well as wine equalisation tax (WET) and luxury car tax (LCT), amounts into the DPN regime.
The GST, WET and LCT amounts will be treated in the same fashion as PAYG amounts, in that they can fall within the ‘Ordinary’ or the ‘Lockdown’ DPN regime, depending upon the relevant entity’s reporting behaviour.
The proposed changes also expand the present estimates regime, allowing the ATO to also make estimates of the GST, WET and LCT amounts for an entity which has failed to lodge its returns. The ATO would therefore be able to make an estimate of an entity’s net amount of liability, calculated by reference to the amount of GST imposed on that entity less its input tax credits.
It is presently proposed that the changes will not be retrospective but will apply to tax periods that start on or after commencement of the legislation.
Conclusion
The risk profile for directors, particularly in the SME space remains a dynamic area.
The current DPN regime brings with it personal liability for directors, making it strongly recommended that they work with their professional advisors to ensure that their company’s reporting processes regarding PAYG and SGC amounts are in place and current.
The proposed changes to the DPN regime are clearly aimed at incentivising compliance with payment of SGC amounts and reporting of GST liabilities.
While they are yet to be implemented, they are being clearly telegraphed by the Government, and directors should be proactively taking the opportunity to ensure that their companies are able to meet these changes head on, to minimise the risk of potentially significant personal liabilities being incurred.
