With the Australian Tax Office (ATO) ramping up its collection activity for Director Penalty Notices, directors need to be aware of the implications and how to best deal with them to avoid personal liability, writes BDO in Australia Partner Mathew Blum.
The ATO has many collection tools in its toolbelt, including Statutory Demands, Director Penalty Notice’s (DPNs), and garnishee Notices.
It has been well publicised that the ATO has ramped up its collection activity with Director Penalty Notices. Estimates are that it is issuing up to 120 notices per day.
This may compel companies to pay the applicable liabilities. However, the ATO can also recover these debts from directors personally. Directors and their advisers need to be aware of the implications of these notices and how to best deal with them to avoid personal liability.
The legal and commercial options need to be thought through. Unfortunately, the latter is often not considered when directors decide on which direction they will take.
What are Director Penalty Notices?
Two types of DPNs can make directors personally liable for unpaid PAYG, GST and Superannuation, and these can broadly be described as:
1. ‘Lockdown’ DPNs - These DPNs can be issued by the ATO to recover debts from directors when certain returns have not been lodged by their due date
2. ‘21-Day Deadline’ DPNs - These can be issued by the ATO when liabilities have been overdue for an extended period. This type of DPN will make directors personally liable for applicable debts if the company does not do any of the following, within 21 days:
a) Pay the debt in full
b) Place the company into liquidation
c) Place the company into voluntary administration
Appoint a small business restructuring practitioner
No Deal: The ATO is taking a stricter approach to DPNs and payment arrangements are no longer provided as an option for directors to avoid personal liability.
A DPN will set out the above legal implications. However, the company’s commercial options and viability often require more consideration, presenting an almost endless sub-set of options and solutions. These commercial options are not apparent by looking at a DPN and can often warrant suitable advice.
Avoiding Director Penalty Notices and Personal Liability
‘Lockdown’ DPNs: Once these are issued, the only way for the director to avoid personal liability is for the company to pay the debt, provided that no defences are available to the director.
Aside from having a statutory obligation to lodge necessary returns on time, directors would be wise to ensure returns are lodged on time to avoid ‘lockdown’ DPNs, regardless of whether the company can pay the liability. A company’s compliance record could also factor into the ATO’s decision-making.
The 21-Day Deadline DPN: If this is issued to directors, not opening the letter or ignoring it will not prevent personal liability. They need to be promptly dealt with and as early as possible within 21 days, so that options can be optimally considered.
In certain circumstances, there could be defences to DPNs or defects. It would be wise to seek advice to consider if there are any such options e.g. Is there sufficient evidence of ill-health to demonstrate that the director could not fulfil the applicable role?
Paying the debt could be an obvious solution. However, this could be easier said than done, particularly if the company is having cash flow difficulties or if there is a viability issue.
In some circumstances, an external administration will avoid the personal liability for the directors which presents a ‘fork in the road’, where it can be difficult to decide which path to take.
The Viability Assessment – A ‘Fork in the Road’
When considering how to deal with a 21-Day DPN, the viability of the company and/or its business can be critical to the decision-making process:
- Is the company viable? It will be considered viable if it can prevail through circumstances and overcome the DPN liability, upon considering all relevant factors and risks.
- It will be considered not viable if by soldiering on, there is a realistic chance that the company could fail in the future, leaving the directors to pay the DPN liability. Perhaps an external administration would be the preferred option.
The viability is important to consider before the 21-Day deadline expires and the sooner it is considered, then the more thought-out the viability assessment will be:
- If for example, the directors realise that the company is not viable and it ought to be placed into external administration on the 22nd day after the DPN is issued, then they have left themselves to be personally liable for the DPN debts, for no reason other than being slow to act.
- The viability of the business (as distinct from the company) could also play into the decision-making process and needs to be promptly assessed. For example, business profits could help the company prevail, or business losses may exacerbate the problem.
- Conversely, the circumstances may warrant a liquidation, small business restructuring appointment, or voluntary administration to restructure the company’s affairs and return it to the directors.
Read the Road Signs
The stakes are high when taking the wrong path could lead to personal liability, so directors need to take the time to read the signs and be sure they are making the right decision.
The viability assessment can be complex for directors, particularly when it is not necessarily their area of expertise. Seeking advice can provide clarity regarding the available options and help navigate the situation.
Our team of experienced business restructuring professionals are available to help. For more information, please contact your local BDO adviser.
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