Receiving a Director Penalty Notice (DPN) from the ATO is a confronting experience. As company directors, these notices can have significant implications on your personal liability and the future of your business.
DPNs shouldn’t be ignored, and knowing the type of DPN you receive can help you avoid personal liability over your tax debt. There are two types of DPNs given by the ATO: Lockdown and Non-Lockdown DPNs.
This blog looks at the differences between the two and how you can manage them. But before that, we’ll have to understand the obligations of a company director.
DPNs and the director's obligation
As a company director, you are legally responsible for the reporting obligations of your company to the ATO. Director penalty notices are given out to directors who haven’t:
- Paid their business’ Pay As You Go Withholding (PAYGW) and Goods and Services Tax (GST) when it’s due
- Paid their business’ superannuation when it’s due, or lodge a Superannuation Guarantee Charge Statement (SGC Statement) if they are unable to do so
- Lodge their quarterly Business Activity Statements (BAS) with the ATO.
Company directors who have failed to fulfil their tax obligations will be sent a director penalty notice as a reminder. The ATO has been increasing its debt-chasing efforts, and it’s now become more common for directors to receive a DPN. We’ve also seen a rise in DPNs for newly appointed company directors and those who have resigned from a company.
What is a Non-lockdown DPN
Non-lockdown DPNs are issued to directors who have not paid their PAYG, GST and/or super debts. However, directors in this scenario would have lodged their business activity statements, instalment activity statements, or submitted a superannuation guarantee charge statement.
DPNs mean you are personally liable for your company’s debts, and the ATO can take action against you if you don’t respond to the notice. You have 21 days to respond to the DPN in one of the following ways:
- Pay the debt
- Place the company under voluntary administration
- Appoint a small business restructuring practitioner to begin restructuring your company
- Liquidate the company to pay off debts
There is also an option for directors to enter into a payment plan with the ATO. However, company directors should exercise caution in this step.
There is a mistaken belief that entering into a payment plan with the ATO will remove the director from all personal liability. However, should the director become unable to pay off the debts under the plan, the ATO can take action against the director personally, placing their personal liabilities under risk.
What is a Lockdown DPN?
Lockdown DPNs are issued to company directors who have failed to lodge their business activity statements, instalment activity statements, or superannuation guarantee charge statements within three months of their due date.
These DPNs automatically ‘lock down’ the director, and they will be unable to avoid penalties unless they pay the debt in full. The ATO typically estimates how much a company owes in PAYG, GST, and super debts, and will provide an amount for the director to pay.
Directors who are unable to pay the amount stated in their lockdown DPN within the stipulated timeframe may be declared bankrupt. Additionally, their personal assets may have to be sold to repay the debt.
More importantly, the ATO can still issue lockdown DPNs even if the company director has placed the company in voluntary administration or liquidation or has appointed a small business restructuring practitioner. As such, managing DPNs early is the best course of action, as it can potentially offer more opportunities for debt mitigation.
How do I respond to a DPN?
If you’ve received a DPN, here is a step-by-step guide on how you can respond to it:
Step 1: Determine if your DPN is a non-lockdown or lockdown DPN.
Step 2: Check what you owe (PAYG, GST, Super) and your payment deadlines. Non-lockdown DPNs require a response within 21 days of the date stated in the letter.
Step 3: Seek professional advice from a restructuring practitioner to know your options
Step 4: The restructuring practitioner will assess your company’s current financial situation and your ability to pay off the debt.
Step 5: The restructuring practitioner will take the best course of action, often involving one of the following:
Key takeaway: Don’t wait. Don’t ignore.
Managing a Director Penalty Notice can be overwhelming, and there isn’t a universal approach that works for every director. With the guidance of an experienced restructuring expert, you can get tailored advice, whether that involves repaying your debt or undertaking small business restructuring.
With decades of experience in business restructuring, the team at Olvera First can offer a tailored solution to your DPN. Contact our team today to chat about how we can help you achieve a positive turnaround.
