The tax office is able to recover from the directors' a company's unpaid PAYG tax and superannuation, by issuing any or all of the directors with a Director Penalty Notice (DPN).

There are two types of DPN .

1. A 21 Day DPN (non-lockdown) – for PAYG Tax or Super Unpaid but where Returns have been lodged within 3 months of the due dates.

That is, if the BAS were lodged within 90 days of the due dates but the PAYG Withholding and Super have not been paid, a DPN can be issued to directors.   The directors can avoid personal liability if:

- the PAYG or Super is paid, or

- the company is placed in liquidation or administration within 21 days of the date of issue of the DPN ( not from the date received).

2. A Lockdown DPN – for PAYG Tax or Super Unpaid and Returns not lodged within the required time.

If this occurs, the directors are automatically personally responsible for unpaid PAYG tax and super.   When this happens:

- The ATO will issue a DPN to the directors

- Even placing the company in liquidation will not avoid the director liability.   The ATO does issue DPN's after a company is placed in liquidation.

- The ATO can also estimate the company liability and issue a DPN based on the estimate.

Super Due Dates

From 1 May 2019, new legislation changed the date from when directors become personally liable for superannuation.

Super is due for payment 28 days after the end of each calendar quarter, and if not paid by that date, SGC statements must be lodged within 30 days after that.   For example, the June super must be paid by 28 July and if not, must be reported to the ATO on an SGC Statement by 28 August.

How can a DPN be Avoided?

Once the dates have been exceeded there is not a lot that can be done, so it is better to avoid the liability upfront:

- Lodge BAS and SGC on time, or at worst within the time limits.   If lodged but not paid the directors have 21 days to appoint a liquidator and avoid personal payment.

- Make sure directors' postal addresses are up to date in ASIC records because DPN's are issued to those addresses.   Non-receipt of a DPN due to a change of address is not a defence to an ATO claim.

- A liquidator must be appointed within 21 day of the DPN date, not when the DPN is received by the director.

- Get professional advice quickly.   Even better, if the company is having financial difficulties, obtain professional advice on the prospects and options available.

What can be done if a DPN is received?

If one is received:

- Promptly obtain advice on the DPN

- Negotiate a personal payment arrangement with the ATO.   It is possible the ATO will want to be satisfied that the company position can improve, so consider a Profit Improvement Plan and Cash Flow Forecast.

- If there are other directors seek a contribution from them towards the debt.   The ATO does not have to pursue all directors, it may just issue a DPN to those who are in a better financial position, and it can pursue old and new directors and those who were directors at the time of the debt.

- Consider a Personal Insolvency Agreement or Bankruptcy petition.

Defences to a DPN

There are few defences to DPN's and they need to be exceptional to succeed.

Options for the Company

Several options are available, assuming liquidation can be avoided:

- Negotiate a payment arrangement for the amounts owed by the company (and so perhaps avoid the issue of a DPN)

- Restructure and turnaround the business

- Obtain further finance or new capital.

Risks of Liquidation

Liquidation has other risks, including:

- personal guarantee claims

- builders lose their licence and may not be allowed to trade for several years

- potential for an insolvent trading claim to be pursued against the directors by ASIC and the liquidator, recovery of preference   payments, loans to directors being recoverable by the liquidator, and also assessable as unfranked dividends by the ATO

- prosecution under Phoenix Trading laws if the business is illegally continued in another entity.

DPN's are frightening and need to be dealt with promptly on receipt.   There are no loopholes or absolute defences.   The best defence is to deal with the financial problems of the company early so that there is no reason for the ATO to rely on DPN's.