How to respond to a director penalty notice?

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As a company director, you are legally responsible for ensuring that the company meets its:

  • PAYG withholding (PAYG);
  • superannuation guarantee charge (SGC); and
  • goods and services tax (GST) obligations.

If a company fails to comply with their PAYG, SGC or GST obligations, the Australian Taxation Office (ATO) may issue company directors with a director penalty notice (DPN), the effect of which is that directors are personally liable in respect to payment of unpaid PAYG, SGC and GST.

If you’ve received a DPN, it is important to immediately determine whether the DPN is either a Non-Lockdown DPN or a Lockdown DPN.

What is a non-lockdown DPN?

Company directors will receive a non-lockdown DPN where:

  • they have lodged the business activity statements, income activity statements or superannuation guarantee statements of the company; and
  • PAYG withholding, SGC debts and GST amounts remain unpaid.

Non-lockdown DPN’s will be remitted if:

  • the company pays the outstanding tax; or
  • goes into voluntary administration or liquidation,

within 21 days of the date on which the DPN is issued.

What is a lockdown DPN?

Company directors will receive a lockdown DPN where a company has not lodged its:

  • business activity statements;
  • income activity statements; or
  • superannuation guarantee statements,

by their due date for lodgement.

In this case, company directors become automatically liable for the unpaid PAYG withholding, SGC and GST to the ATO.

What happens if you don’t pay the director penalty?

After receiving a DPN, a director has 21 days repay the amount set out in the DPN. If the director fails to pay the amount, the ATO is able to:

  • commence proceedings against the director personally to recover the director penalty;
  • use the judgment to issue a bankruptcy notice and subsequently make the director bankrupt; or
  • garnishee funds from the director’s personal bank account or from their wages.

Are there any defences to director penalties?

As a director, you will not be liable for a director penalty if:

  • you did not take part (and it would have been unreasonable to expect you to take part) in the management of the company during the relevant period because of illness or other acceptable reason;
  • you took all reasonable steps, unless there were no reasonable steps you could have taken, to ensure that the company paid the amount outstanding, an administrator was appointed to the company or you began winding up the company;
  • in the case of an unpaid SGC liability – the company treated the Superannuation Guarantee (Administration) Act 1992 (Cth) as applying in a way that could be reasonably argued, was in accordance with the law, and took reasonable care in applying that Act.

It is important to note that as a director, it is not a defence if you relied on others (including fellow directors and professional advisors) to ensure your obligation was met.

How to avoid a director penalty notice?

Before you become a director

If you become a director and the company has outstanding PAYG, GST or SGC obligations, you will become personally liable for a director penalty equal to these amounts, which is why it is of upmost importance that you check for any unpaid or unreported PAYG, GST or SGC liabilities before you become a director of a company.

As a director

As a director you are responsible for making sure the company meets its PAYG, GST and SGC obligations. If your company fails to meet a PAYG, GST or SGC liability in full by the due date, you will become personally liable for director penalties equal to the unpaid amounts.

In order to avoid director penalties, you will need to take steps to have the company lodge and pay its PAYG, GST and SGC to the ATO by the due date.

No longer a director

If you are no longer a director, you remain liable for director penalties equal to the unpaid PAYG, GST and SGC of the company that:

  • were due before the date of your resignation;
  • fell due after your resignation where the first withholding event in the reporting period occurred before your resignation (for PAYG and GST) or the charge became payable before your resignation (for SGC).

In order to avoid director penalties, you will need to take steps to have the company lodge and pay PAYG, GST and SGC obligations that are due before the date of your resignation to the ATO before you resign as a director.

Click here if you want to know more about Taxation.

How we can help

  • Advise you on your rights and obligations as a director of a company (including your taxation obligations and the consequences of non-compliance)
  • Advise you on whether you are liable for a director penalty (including preparing a defence to a director penalty notice)
  • Implement a strategy to avoid receiving a director penalty notice or to respond to a director penalty notice that you have received
  • Represent you in proceedings commenced against you in respect to a director penalty