Power of ATO to issue Notice of Penalty for Directors – Corporation Tax

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Recent comments within the accounting industry and the wider community have focused on increased debt enforcement action by the Australian Taxation Office (ATO) in relation to the company’s unpaid tax debts. , in particular the issues surrounding the ATO’s use of a Director Sanction Notice (PND).

The Tax Administration Act 1953 empowers the ATO to issue a DPN which is ultimately intended to impose personal liability on the director of a company in respect of certain tax debts owed by the company.

In the case of the company’s PAYG and GST, where the debt has not been declared to the ATO, i.e. BAS or IAS filed, within the three months of the relevant statutory due date, the amount of the penalty will be “locked in” and the only way for the director to avoid personal sanctions from the director is to get the company to pay the outstanding debt.

For example: A June BAS quarter with a due date of July 21, 2022 must be filed no later than October 21, 2022. If not, the sanction would be blocked and the administrator could no longer avoid the administrator’s personal sanctions.

To illustrate this point, consider Sally, who is the sole director of XYZ Pty Ltd. XYZ has unpaid GST and PAYG of $100,000 that was incurred for the period January 1, 2020 to March 31, 2020. The BAS for this period was due to be filed with the ATO on April 28, 2020, but has in fact was filed on September 1, 2020. The ATO issues a DPN to Sally seeking personal administrator penalties equal to $100,000. Because the BAS was filed more than three months past its due date, the only way for Sally to escape the directors’ personal penalties is to get the company to pay her outstanding $100,000 ATO debt, if she cannot pay, she is now personally responsible for the penalties. at the ATO of $100,000.

If a company has unpaid superannuation guarantee fees (CMS), the debt must be filed with the ATO on or before the due date of any SGC declaration in order to avoid the “lock-in” of personal director sanctions.

Regardless of whether the company’s BAS or SGC statement was filed on time, the ATO also has the power to issue a DPN to seek to impose personal liability on a director for a penalty amount equal to the amount of the default of a company:

It is important to note that if the company has more than one director, personal liability will extend to all directors of the company, and each will be personally liable for the full amount of the penalty. Resignation as a director will not mitigate a director’s personal exposure with respect to his term of office.

Upon receipt of a DPN (when the relevant liability has been declared within the period mentioned above), a director at 21 days to implement one of the following options in order to avoid the “locking” of the personal sanctions of the administrators:

  • Make the company pay all the debt
  • Appointment of a volunteer director
  • Appointment of a liquidator, or
  • Appointment of a small business restructuring practitioner.

It is also worth noting that once a DPN has been issued, negotiating a payment plan is no longer an option to avoid the “lock-in” of directors’ personal sanctions.

Going back to our previous example of XYZ Pty Ltd, let’s take the same situation, but assume that the company filed its BAS for the March 2020 quarter on July 1, 2020 instead of September 1, 2020. Because the BAS was filed in the 3 months from her due date, when Sally receives a DPN from the ATO, she now has 21 days to implement any of the available options mentioned above to be able to avoid Director penalties.

Thus, even if the company is in financial difficulty, it is essential that the directors:

  • Ensure that they compel the business to comply with its PAYG, GST and SGC filing obligations, even if they cannot pay the associated tax liability, and
  • Seek professional advice immediately upon receipt of a DPN (or at an earlier stage in the event the Company has debts to the ATO that it cannot service) to understand the options available to them.

If you have recently received an DPN or would like more information about DPNs or the possibilities available to you as an administrator, our Business turnaround team are available to discuss your options.

This article is posted as a general comment – please contact us about your particular situation.

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