Directors can no longer seek to enter a payment arrangement with the ATO to avoid personal liability for company tax debts once a non-lockdown director penalty notice (DPN) has been issued.
Recent change to options for non-lockdown DPNs
The ATO has recently made a significant change to the options available for directors to address non-lockdown DPNs.
The options available to directors critically no longer include entering a payment arrangement with the ATO following the issue of the non-lockdown DPN, and in circumstances a non-lockdown DPN is issued directors must do one of the following to avoid personal liability:
- Pay the company tax debts;
- Put the company into administration;
- Appoint a small business restructuring practitioner; or
- Place the company into liquidation.
DPNs are notices issued by the ATO to directors of companies that have overdue tax debts, including PAYG withholding, net GST and SGC obligations.
It is the first step taken by the ATO before pursuing the director personally for company tax debts. Clearly this can have severe ramifications for directors individually.
There are two types of DPNs:
1. Non-lockdown DPN
2. Lockdown DPN
Critically, the 21-day period referred to above commences from the date of the DPN, not when it is received.
Although issued with a DPN, a director will not be liable for a director penalty if:
- The director did not take part (and it would have been unreasonable to expect the director to take part) in the management of the company during the relevant period because of illness or another acceptable reason.
- The director took all reasonable steps to ensure that, either, the company paid the amount outstanding, an administrator was appointed to the company, a small business restructuring practitioner was appointed to the company, or that the directors began winding up the company.
- Where there is an unpaid SGC obligation – the company treated the Superannuation Guarantee (Administration) Act 1992 (Cth) as applying in a way that could be reasonably argued, was in accordance with the law, and took reasonable care in applying that legislation.
What the change in options means for directors
With increased ATO collection commencing and a further ramp up expected following the Federal election, directors of companies that have tax debts outstanding should seek to engage early with the ATO. Directors cannot simply rely on the ATO’s recent inactivity in the vain hope outstanding taxes will not be collected, and in light of the changes to non-lockdown DPNs there is a real need for engagement before such a notice is issued.
Directors of companies with significant tax debts (especially those that pre-date lockdowns) should consider the safe harbour regime. It should be noted however that the safe harbour of itself will not cure personal liability if a DPN is issued, and rather it is the actions taken as part of the plan that are critical including engagement with the ATO.
Directors should seek to avoid an unplanned insolvency event in circumstances where a DPN is issued and there is only 21 days from the date of such notice to figure out a solution. Safe harbour can allow the appropriate contingency planning, even if an outcome with the ATO cannot in fact be reached. Such planning will allow a better outcome for creditors, even if that involves a restructure through a deed of company arrangement. Whether intended or not, the changes to the options available to address non-lockdown DPNs will likely lead to an increase in insolvency appointments as directors seek to avoid personal liability.