As a general rule in business, a director is not held responsible for the debts of a company. There are certain circumstances where this can be altered, one of which is by the use of Director Penalty Notices (DPN’s). These notices are a very powerful tool that the ATO uses to recover specific debts owed by companies from the directors personally.
The ATO can only issue a DPN against the following types of debt:
- PAYGW – tax withheld from employees’ wages
Please note though that there is current talk of the ATO extending their power to also cover GST but this is not yet legislated.
How are DPNs issued?
Currently there are 2 ways a DPN can be issued:
- If you fail to lodge your BAS or Superannuation Guarantee Charge forms within 3 months of the due date then the DPN is deemed automatically issued (you will not know this has happened as there is no paperwork).
- If you have lodged on time but not paid, the ATO can issue a DPN for the outstanding monies and you will have 21 days to take action.
If you fall into category 1, the only way to remit the penalty is to pay the outstanding balance. The worst case scenario under this situation is that you personally could go bankrupt if you don’t pay.
If you fall into category 2, then you have a few options. You can either:
- Pay the Debt
- Appoint an administrator
- Appoint a liquidator
If you fail to take any action during the 21 days from the date of the DPN, then the only option left is to pay the debt and we are back to the same scenario that the worst case is personal bankruptcy.
Defending a DPN
A DPN can be defended in very limited circumstances. As a general rule the court holds these defences to a very high standard and they are not easy to pass:
- You (the director) did not take part (and it would have been unreasonable to expect you to take part) in the management of the company during the period the debt was accrued because of illness or for some other good reason
- You took all reasonable steps to ensure that one of the following happened:
- The company paid the debt
- An administrator was appointed
- A liquidator was appointed
It should be noted that relying on the work of others, such as a bookkeeper, other directors or accountant is not a defence.
For business owners who have multiple interests, it’s paramount that you understand which companies you are a director of and for what time periods. Even if you resign as a director, but you were a director when the liability accrued, you may still be liable.
If you have a tax debt that you are unable to pay in full, we recommend early engagement with the ATO to discuss your payment options. As your tax agent, Marsh & Partners are able to assist with this and negotiate a solution on your behalf.
If cash flow is a growing concern in your business, it may be time to speak to a professional advisor to help get your finances back on track. You can contact our cash flow experts on (07) 3023 4800 or at email@example.com.