In Australia, company directors hold significant responsibilities, including ensuring their company meets its tax and superannuation obligations. The Director Penalty Regime, enforced by the Australian Taxation Office (ATO), holds directors personally liable for certain unpaid company debts, such as Pay As You Go (PAYG) withholding, Goods and Services Tax (GST), and Superannuation Guarantee Charge (SGC).
This article provides a detailed overview of Director Penalty Notices (DPNs), the circumstances under which directors can be held personally liable, available defences, and key case law. Whether you are a director or an associate of a director, understanding your obligations under this regime is essential to avoid personal liability.
Key Takeaways
Directors can be personally liable for unpaid PAYG, GST, and SGC under the Director Penalty Regime.
The ATO issues Director Penalty Notices (DPNs) to notify directors of their liability.
There are two types of DPNs: Non-Lockdown DPNs and Lockdown DPNs.
Directors have limited defences against DPNs, which must be substantiated with evidence.
Associates of directors may also be held liable in specific circumstances.
Case law highlights the importance of active involvement in company management.
What is the Director Penalty Regime?
The Director Penalty Regime is a legal framework designed to ensure that company directors fulfil their tax and superannuation obligations. If a company fails to meet these obligations, the ATO can recover unpaid amounts directly from the directors.
Key Liabilities Covered
PAYG Withholding: Tax withheld from employee wages.
GST: Goods and Services Tax collected by the company.
SGC: Superannuation contributions owed to employees under the Superannuation Guarantee (Administration) Act 1992.
What Are Director Penalty Notices (DPNs)?
A Director Penalty Notice (DPN) is a formal notice issued by the ATO to a director, outlining unpaid company debts and the actions required to avoid personal liability.
Types of DPNs
Non-Lockdown DPNs:
Issued when the company lodges its Business Activity Statements (BAS), Instalment Activity Statements (IAS), and SGC Statements within the required timeframes.
Directors have 21 days to take one of the following actions:
- Pay the debt in full
- Appoint an administrator
- Appoint a small business restructuring practitioner
- Begin winding up the company
Lockdown DPNs:
Issued when the company fails to lodge BAS, IAS, or SGC Statements within the required timeframes.
Directors have no options other than paying the debt in full to avoid personal liability.
Defences Against Director Penalty Notices
Directors may raise defences against DPNs under specific circumstances. These defences must cover the entire period of the director’s obligation and be supported by evidence.
Valid Defences Include:
Non-Participation in Management:
Due to illness or other acceptable reasons.
Note: Non-participation may still constitute a breach of duty, as highlighted in DCT v Lesley Frances Robertson [2009] NSWSC 597.
Reasonable Steps Taken:
Ensuring the company met its obligations.
Appointing an administrator or liquidator.
Reasonable Care in SGC Compliance:
If the company reasonably applied the Superannuation Guarantee (Administration) Act 1992.
Invalid Defences:
Reliance on others, such as fellow directors or professional advisors (Canty v Deputy Commissioner of Taxation [2005] NSWCA 84)
Liability of Associates
In some cases, associates of a director may also be held personally liable for unpaid PAYG withholding amounts.
Who Qualifies as an Associate?
Relatives, partners, spouses, or children of the director.
When Can an Associate Be Liable?
If the associate knew or could reasonably be expected to have known that the company failed to pay withheld amounts.
Defences for Associates:
Taking reasonable steps to:
Influence the director to notify the ATO of withheld amounts
Influence the director to pay the withheld amounts
Influence the director to appoint an administrator or liquidator
Report non-payment to the ATO or relevant authority
Relevant Case Law
Canty v Deputy Commissioner of Taxation [2005] NSWCA 84
This case emphasised that defences to DPNs must be proven for the entire period of the director’s obligation. Reliance on others does not constitute a valid defence.
DCT v Lesley Frances Robertson [2009] NSWSC 597
The court held that non-participation in company management typically involves a breach of duty, regardless of the director’s awareness.
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Frequently Asked Questions
What is a Director Penalty Notice (DPN)?
A DPN is a formal notice issued by the ATO to hold directors personally liable for unpaid company debts, such as PAYG withholding, GST, and SGC.
What is the difference between a Non-Lockdown DPN and a Lockdown DPN?
A Non-Lockdown DPN provides directors with options to avoid personal liability, such as appointing an administrator or paying the debt in full.
A Lockdown DPN offers no options other than paying the debt in full.
Can a director rely on professional advisors to avoid liability under a DPN?
No, reliance on professional advisors or fellow directors is not a valid defence (Canty v Deputy Commissioner of Taxation [2005] NSWCA 84).
Can associates of directors be held liable for unpaid company debts?
Yes, associates such as relatives or spouses may be held liable if they knew or should have known about the unpaid debts and failed to take reasonable steps to address them.
What steps can directors take to avoid personal liability under the Director Penalty Regime?
Ensure timely lodgement of BAS, IAS, and SGC Statements
Pay all tax and superannuation obligations on time
Actively participate in company management
For further assistance with Director Penalty Notices or related matters, contact our experienced legal team today
