Challenging a DPN

As you know for some time now there has been a lot of ATO recovery activity, including through the use of DPNs.

Recently, we received instructions in a matter where a company director got hit with a DPN but didn’t take any action to put the company into admin/liquidation/SBR or pay the amount claimed.

Before turning to the matter and how we supported our client, we thought we’d provide a brief run-down of how DPN’s operate.

What is a DPN?

If a company has failed to meet one or more of its reporting obligations and payments, the ATO may issue its directors with a DPN. A DPN can make a director personally liable for three types of tax debts:

  1. pay as you go withholding (PAYGW);
  2. goods and services tax (GST); and/or
  3. super guarantee charge (SGC) debts.

Non-lockdown v lockdown DPNs?

There are two types of DPNs which may be issued by the ATO:

  1. Non-lockdown DPNs, which will be issued by the ATO when a company’s debts are unpaid:
    1. PAYGW or net GST debt must be reported within 3 months of the due date; and
    2. SGC debt must be reported by the due date of the SGC statement.
  2. Lockdown DPNs which will be issued by the ATO when a company’s debts are unpaid but not reported within the timeframes outlined above.

DPNs are concerning because they can pierce the corporate veil and remove the limited liability protection that a company provides, exposing directors to the risk of taking on debt personally or being sued in their personal capacity. If the ATO has issued a non-lockdown DPN, a director has 21 days from the date it was issued to avoid personal liability for the debt. They can do so by either:

  • paying the debt;
  • appointing an administrator;
  • appointing a small business restructuring practitioner; or
  • appointing a liquidator to begin the process of winding up the company.

How we resolved the DPN issue

As our client had not taken any steps in response to the DPN served on him, the ATO then kicked off debt recovery proceedings. Initially, it seemed like an uphill battle, but after digging into it, we managed to identify a defence based on illness or extenuating circumstances that meant the director was not able to manage the company.

Having identified a defence to the ATO debt recovery proceedings, our client was now in a position to try to do a deal with the ATO to manage the tax debt.   Ultimately, our client was able to achieve a commercial resolution of the claim made against him by the ATO.  This is because of the defence that we had identified in response to the proceedings commenced by the ATO.

Ignoring a DPN leaves a director exposed to personal liability and likely debt recovery proceedings, but in the right circumstances a defence might be available to the debt recovery proceedings.  Even when things seem bleak, a close look into the situation before the DPN was issued can sometimes reveal a possible way out.

Key Contact

Chris Kintis

Partner, Sydney

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.