ATO and DPNs – Beware!

The Australian Tax Office is flagging an important change in its approach to debt collection and insolvency, with a return to full-time status for its collections department and a renewed focus on the recovery of debts owing.   Anecdotally, we have already experienced an increase in enquiry rates from directors concerned by the change in approach now being adopted by the ATO.

The 2020-2021 Commissioner of Taxation Annual Report shows debts owing to the ATO are climbing by large amounts every year, with outstanding tax liabilities rising from $33.8 billion at the end of the 2015 financial year, to $58.8 billion at the end of the 2020 financial year.  According to the Report, small businesses continued to account for the majority of collectable debt, and the economic challenges of the COVID-19 pandemic have only intensified this issue.  The Report also notes that the ATO responded to the recent challenges by providing options including individually tailored payment plans for businesses owing large amounts as well as longer time frames to repay debts.

While supporting small businesses through the pandemic by significantly reducing the number of winding up applications, the ATO is expected to begin to start recovery measures to address the spiralling debt.   For example, prior to the pandemic in 2017-2018, the number of winding up applications was 1,282 (www.asbfeo.gov.au), compared to only 7 applications initiated by the ATO during COVID (April 2020-July2021).

Recovery of debts will be a “key focus” of the ATO’s payment and debt strategies moving forward and businesses, and Directors, will need to be aware of the actions the ATO can take moving forward, including the use of Director Penalty Notices (DPNs).  Recently the ATO sent approximately 50,000 letters to directors at their home address warning of the personal consequences on directors on non-compliance of companies to tax obligations.

What is a Director Penalty Notice (DPN)?

A DPN is a notice issued by the ATO to the Director of a company that has outstanding tax debts or non-reported tax debts.   If the notice is not complied with, and the amounts remain unpaid, within 21 days from the date of the notice, the Directors may become personally liable for the debts and the ATO can begin proceedings against them to recover the outstanding amount.

There are two types of DPNs:

1. A Non-Lockdown or Standard DPN

These are issued when a company has lodged the relevant returns with the ATO within the required time frames, but has not yet paid the amounts owing.

The timeframes allowed for lodging returns are:

• GST and PAYG –within 3 months of their due date.
• Superannuation Guarantee Statement (SGC) – the SGC return must be lodged within 1 month and 28 days after the end of the quarter it relates to.

2. A Lockdown DPN

These apply when a company has not lodged their GST/PAYG or SGC returns, or within the timeframes noted above.

Avoiding Personal Liability

When issued with a Standard or Non-Lockdown DPN, directors can take any of the following actions, within 21 days from the date the notice, to avoid becoming personally liable:

1. Pay the debt.
2. Place the company into Voluntary Administration.
3. Place the company into Voluntary Liquidation.
4. Appoint a small business restructuring practitioner (SBRP).

Previously, the ATO offered the option of entering into a payment plan or arrangement to remit the DPN;  this option is no longer available.

The eligibility criteria for small business restructuring is prescribed by the Corporations Regulations, and includes a test for relevant liabilities and their calculation. Only small businesses, deemed viable, will be eligible to appoint an SBRP to restructure their debts and allow them to continue trading and many will not have this option available.

There are no options available to Directors issued with a Lockdown DPN, other than payment of the debt.  The appointment of an Insolvency Practitioner will not remit the DPN once the debt is “locked down”.  Accordingly, it is important that returns are lodged even if there are no funds to settle the amount owing.

What To Do When Issued with a DPN

If you receive a non-lockdown DPN (which will be sent to  the director personally (usually to the address recorded at ASIC)), the Director should seek specialist advice from an accountant or insolvency practitioner immediately to understand the options available.   Given the strict time limits that apply, the Director needs to act quickly to protect themselves from being held personally liable.

More importantly, the Directors of a business must work proactively to ensure that the company’s reporting is accurate and meets all of the relevant deadlines. If a Director  finds themselves in a position where it is difficult for the company to meet its taxation liabilities they must  act quickly to achieve a resolution, instead of waiting for a DPN to be issued! 

For more information on DPNs or your financial responsibilities contact Mike Smith, Peter Hillig or Rommel Alfonso at Smith Hancock.