11 September 2013 by Andrew Cummins
The ATO has taken some time to reveal their new powers to recover debts under the new director penalty notice (DPN) regime. The new regime came into effect in June 2012.
Initially it appeared that the ATO was reluctant to exercise its new powers. It now appears that the grace period has ended, and the ATO has begun to pump out penalty notices
Under the previous DPN regime, company directors could be personally liable for unpaid PAYG tax liability. However, the ATO could not commence recovery proceedings against the director for the company’s unremitted PAYG until it had served a DPN on the director. In order to avoid personal liability, directors had to take one of the following courses of action within 21 days of service of a DPN:
- Payment of the liability;
- Appointing an administrator to the company; or
- Appointing a liquidator to the company.
Under the new DPN regime, the ATO will still be prevented from commencing recovery proceedings against the director until it has served a DPN. However, where PAYG and superannuation remain unreported and unpaid within 3 months after the due date for payment, then the director cannot avoid personal liability by placing the company into administration or liquidation.
For example, Alex and Jess are directors of Fresh Nuts Co, which is required to pay amounts withheld under the PAYG withholding provisions to the ATO on a quarterly basis. During the March quarter, Fresh Nuts Co withholds $6,000 from payments made to its employees. Fresh Nuts Co fails to report and pay any of the withheld amounts to the ATO by the due date (i.e. 28 April). From that day the ATO is entitled to serve a DPN, making Alex and Jess personal liable to the penalty but can be avoided by either paying the liability, appointing an administrator, or appointing a liquidator.
If Fresh Nuts Co fails to report and pay any of the withheld amounts to the ATO within three months after the due date (i.e. by 28 July), the ATO is entitled to serve a DPN, making them personally liable, but this time, the only way they can avoid personal liability is by causing the company to pay the amounts withheld. Subsequently reporting the debt (i.e. three months and one day after the debt became payable) will not have any effect.
A new director can also become liable for unpaid ATO debts preceding their appointment. If a company has not paid or reported its PAYG or SGC liability to the ATO within three months after the payments became due, then the new director will become personally liable for those debts 30 days after their appointment
For the first year of operation of the new regime we observed an increasing number of DPNs being issued by the ATO for unpaid PAYG and SGC liability, even after the company was placed into liquidation. We also observed that some directors have not kept their registered addresses up-to-date on ASIC's record and a DPN delivered to an old address is valid. It is important to note that the 21 days notice is taken to be given to the director at the time the ATO “leaves or posts it”
In some instances, the ATO has issued garnishee notices to third parties (e.g. a bank, or someone who owes money to the director’s company) requiring them to pay all or part of that money to the ATO. No debt is too small to attract the ATO’s attention.
We expect the number of DPNs issued to continue to increase as the ATO ramps up training of its staff and automates the DPN process. Directors must be fully aware of the financial position of their company. This means taking all reasonable steps to take prompt action to avoid or mitigate personal liability and more importantly ensures that the company does not incur financial commitments that it cannot meet
What should directors do?
Here are our top tips to avoid personal liability:
- Report on time – even if the debts cannot be paid, it is prudent that the liabilities are reported on time. Directors need to ensure they report PAYG tax and SGC liability within three months of them becoming due. This reserves the rights and options available to directors to avoid personal liability.
- Consider a payment plan. If you cannot pay, then consider negotiating a realistic payment proposal with the ATO if the liabilities are unpaid and unreported beyond three months after the due date.
- Reconsider the priority of creditor payments. Directors need to ensure that PAYG and superannuation debts are paid as promptly as possible.
- Undertake due diligence to ascertain the PAYG and superannuation liability position before accepting appointment as director. New directors can be deemed liable for debts incurred before their appointment after 30 days.
- Ensure your company’s registered address details are up to date on ASIC's record. DPNs will be validly served if they are posted to the registered address as listed with ASIC, in some instances, to the accountant or tax agent’s address.
- Consult with an insolvency specialist. If the company has cash flow issues, then there are provisions in the Corporations Act which can be utilised to rescue your company by implementing arrangements with creditors. There are options other than liquidation
BRI Ferrier is a leading Australia-wide network of independent reconstruction, turnaround and insolvency firms. BRI Ferrier has extensive experience advising on matters relating to penalty notices. If you receive a DPN from the ATO, please contact us to discuss your options.