Have you been on an ATO payment deferment? What if you can’t pay, what are the ATO’s rights against you as a director?
The ATO is focusing in on issuing DPN's to directors to ensure payment and that companies aren't incurring more and more debt.
The Federal Government’s Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 has received Royal Asset and is set to commence from 1 April 2020.
One of the more significant measures under the reforms is the extension of the Director Penalty Regime to include Goods and Services Tax (GST), Luxury Car Tax (LCT) and Wine Equalisation Tax (WET) obligations.
DPNs have, until recently, been restricted to debts relating to Pay As You Go (PAYG) withholding and Superannuation Guarantee Charge (SGC) obligations.
If you are a director of a company, or are contemplating taking on a directorship, you need to be aware of the increased risk now posed by these developments.
What is the Director Penalty regime?
As a company director, you are under an obligation to ensure the company can meet its financial obligations.
For some years now, the Australian Tax Office (ATO) has had the power to make directors personally liable for certain debts of the company by issuing Director Penalty Notices. This is a significant shift from the concept of limited liability of individuals associated with companies.
From 1 April 2020, the regime will extend to include GST, WET and LCT liabilities. This change means uncooperative directors will no longer be able to exploit the current gap that exists in relation to GST (and other indirect taxes) liability.
Before the ATO can recover director penalties they must issue a Director Penalty Notice (DPN) stating the unpaid amounts and remission options available. Once issued, payment of either the penalty or the company’s liability will satisfy the obligation but either party only has 21 days from the date of notice to achieve this. Failing to comply will lead to further recovery activity which may include issuing garnishee notices, offsetting personal tax credits or initiating legal proceedings.
There are two types of DPN and the type that is issued depends on the specifics of the obligations directors have failed to meet:
1. Non-lockdown DPN
Issued to a director who has lodged a BAS within three months of the due date but the PAYG and GST amounts remain unpaid.
Under a non-lockdown DPN, directors have the option to avoid personal liability if within 21 days the company:
- pays the debt or makes a suitable arrangement to pay it;
- appoints a voluntary administrator; or
- places the company into liquidation
2. Lockdown DPN
Issued to a director who has failed to lodge a return within three months of the due date and failed to pay the PAYG and GST amounts.
The only option for directors to avoid personal liability is for the company to pay the debt within 21 days of the DPN being issued.
DPNs can be issued on estimates of GST liabilities
From 1 April 2020, new legislation also allows the ATO to estimate GST liabilities and issue DPNs based on estimates. These types of DPN will most likely be Lockdown, as the GST will not have been reported to the ATO within three months.
There is no 3-month grace period for SGC
The changes also included an amendment to the reporting timeframes for super and allows the DPN regime to impose an automatic Lockdown DPN on directors if a company’s SGC liabilities aren’t remitted within 28 days of a due date, usually the end of a quarter. The amendments were introduced to prevent directors avoiding personal responsibility for unpaid SGC debt by putting their company into administration or liquidation.
Recently appointed directors can be held personally liable for historical SGC, PAYG and GST liabilities if they remain unpaid and unreported within 3 months or more after the date of the appointment. If you are about to become a company director, you should check for any unpaid or unreported ATO liabilities before your appointment.
If you have any concerns or questions about DPN’s and how they could affect you or your business, please contact us for further advice. You can reach us at firstname.lastname@example.org.