ATO Director Penalty Notices are under review — what company directors need to know

Company and personal liabilities are normally separate. The director penalty regime is an important exception.

Directors are responsible for making sure the company reports and pays certain PAYG withholding, GST and superannuation guarantee charge obligations. Where those obligations are not met, a director can become personally liable for an amount equal to the company's unpaid liability. Those amounts are called director penalties.

The ATO must give a director a DPN before it can commence proceedings to recover the director penalty. The notice sets out the unpaid amounts the director is liable for and the remission options available.

Where the relevant requirements have been met, the ATO says it may recover director penalties through measures including garnishee notices, applying the director's tax credits against the director penalty, and legal recovery proceedings.

A director penalty is also a parallel liability: payments made against either the company's debt or the director penalty reduce both.

The volume of notices is part of the reason. The review is not questioning whether DPNs should exist — the Tax Ombudsman describes them as an important tool for collecting company tax debts and holding directors accountable.

The question is how the ATO administers them.

The Terms of Reference say the review will examine whether, before, during and after issuing a DPN, the ATO's communications to current and former directors provide adequate and timely information about their obligations, the director penalty, the underlying company debt and the actions available to them.

It will also examine whether the ATO appropriately and consistently considers the circumstances of affected directors, including during recovery, and how it identifies and responds to vulnerability, coercive directorship and financial abuse.

The Ombudsman has also pointed to concerns raised through complaints about former directors: a person can receive a DPN relating to a period when they were a director, then struggle to obtain information from the ATO because they are no longer recognised as an authorised contact for the company.

These are matters the Ombudsman is examining. No findings have been made.

One of the most important things for directors to understand is how quickly the regime operates.

The Commissioner generally cannot commence proceedings to recover a director penalty until the end of 21 days after the DPN is given to the director.

Current ATO guidance explains that the notice is taken to be given when the Commissioner leaves or posts it. In practical terms, the 21 days does not necessarily start when the director happens to open the envelope.

That makes keeping director address information current with ASIC particularly important.

If a DPN arrives, get advice immediately rather than working out the deadline yourself.

The options available to have a director penalty remitted can depend on whether the underlying liability was reported on time.

For PAYG withholding and GST, liabilities that are reported late can become subject to what is commonly described as a lockdown DPN. For superannuation guarantee charge, failing to lodge the required superannuation guarantee statement by its due date can also substantially restrict the remission options available.

The exact statutory tests are more detailed than that summary, and they turn on the specific liability and reporting period. The practical point is simpler.

Lodging and paying are two different problems. A business may not have enough cash to pay an ATO liability immediately. That does not mean required lodgments should stop.

Allowing required lodgments to remain outstanding can materially worsen a director's personal position under the DPN regime. Lodging does not remove the underlying debt — but it preserves options that late lodgment can close off.

Becoming a director of a company that already has outstanding PAYG withholding, GST or SGC obligations should not be treated as an administrative formality.

Current ATO guidance provides that a new director will not be liable for a director penalty that was due before their appointment if, within 30 days of appointment, the company deals with the amount in one of the ways set out in that guidance. Understand the company's ATO position before accepting the appointment, not afterwards.

Resigning also does not automatically extinguish director penalties associated with liabilities arising from periods connected with the person's directorship.

Exactly where a director stands depends on the type of liability, the reporting period, the appointment and resignation dates and the company's reporting history. Incoming and outgoing directors in this position should obtain advice rather than assume a date on an ASIC record resolves it.

The legislation also contains statutory defences in particular circumstances, but they are specific and evidence-dependent. If you believe a defence may apply, get advice promptly.

The Ombudsman is specifically examining how the ATO identifies and responds to vulnerability, coerced directorship and financial abuse.

Some people are recorded as directors without genuine control of the company. Others are prevented from participating fully in management because of circumstances such as serious illness. In each case a director penalty can still arise from the company's unpaid liabilities.

None of those circumstances automatically removes a DPN. What the review is looking at is how consistently and appropriately the ATO recognises and responds to them.

The review is worth following, but directors should not wait for its findings.

If you are a company director, know whether the company is up to date with its PAYG withholding, GST and superannuation obligations. That is the first question, and it should have a definite answer.

If amounts cannot currently be paid, keep the reporting obligations under review, understand exactly what is outstanding, do not ignore ATO correspondence, and obtain advice about the options available.

Where a company is genuinely financially distressed, the right answer usually involves coordinated tax, legal and restructuring or insolvency advice rather than any one of those in isolation.

And if you have received a Director Penalty Notice, deal with it immediately. The appropriate response depends on the underlying liability, when it was reported, whether it is locked down, the company's current position and your own circumstances. Where required, we work alongside legal and restructuring specialists on those matters.

A DPN is one of the clearest examples of why company tax debt cannot always be treated as simply a company problem.

The best time to deal with PAYG withholding, GST or unpaid super is well before a Director Penalty Notice arrives. Keep reporting obligations under control, know what is owed, deal with ATO correspondence and get advice early.

If a DPN has already been issued, the issue is more urgent.

Do not wait for the Tax Ombudsman's review to conclude before acting on a notice that applies to you.

If you're concerned about a company ATO debt or have received a Director Penalty Notice, speak with Wakefield Pacific as soon as possible so we can review the position and work out what needs attention. You can also read about how we approach tax and accounting and business advisory, or read the review or provide feedback directly with the Tax Ombudsman.