The ATO is continuing with its efforts to reclaim unpaid debts.^[1] Among their debt collection tools are Director Penalty Notices (DPNs), signalling a heightened urgency for directors to address outstanding tax obligations.

With about 30,000 DPN’s having been issued in the first half of 2024,^[2] understanding the implications and defences surrounding these notices is important for directors navigating financial turbulence.

This article delves into the intricacies of DPNs, explores available defences, and outlines the consequences of non-compliance.

What is a DPN?

If a company has failed to meet one or more of its reporting obligations and payments, the ATO will issue its directors with a DPN. A DPN can make a director personally liable for three types of tax debts:^[3]

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, but:
   1. PAYGW or net GST debt is reported within 3 months of the due date; and
   2. SGC debt is reported by the due date of the SGC statement; and
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.

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
• winding up the company.

If the ATO has issued a lockdown DPN, a director can only avoid personal liability if they pay the debt in full within 21 days from the date it was issued, or if they have a defence available to them. Importantly, a director of a company that has already been placed into voluntary administration or liquidation can still be issued with a lockdown DPN.

What defences are available to a director that has been issued with a DPN?

If a non-lockdown DPN has been issued and a company does not take any of the steps outlined above, or a lockdown DPN has been issued and payment is not made, there are limited circumstances, outside of paying the debt in full, in which a director can avoid personal liability.

In this part we will discuss the three defences which may be available to a director under s 269-35 of the Taxation Administration Act 1953 (Cth) (‘Act’).

Illness / Other good reason

There may be a defence available to a director that did not and could not have reasonably been expected to take part in the management of the company due to illness or ‘some other good reason’.^[4]

• To establish the illness defence, it will not be enough for a director to show that they suffered from an illness, even if the illness is ‘serious and prolonged’. ^[5] They will not need to establish that the illness was ‘incapacitating’, but they will be required to establish that the illness had a ‘significant adverse impact’ on their ability to participate in the management of the company.^[6]
• A director can also establish ‘some other good reason’ for non-participation. This must be a good reason from an objective standpoint, with the duties of directors including the standard of care and skill they must exercise being taken into account.^[7]
• A director will ultimately be required to establish that they did not participate in the management of the company, because of illness or some other good reason, for the entire period from the due date until the expiry date of the DPN.^[8]

All reasonable steps

There may be a defence available to a director if they took all reasonable steps, or there were no reasonable steps which could have been taken, to ensure that the company paid the debt, appointed an administrator or a small business restructuring practitioner, or began winding up.^[9]

• The court must have regard to the factors under s 269-35(3) of the Act when determining whether a director has taken reasonable steps. These are ‘when, and for how long’ the person was a director taking part in the company’s management and ‘all other relevant circumstances’.
• The court will also consider ‘the circumstances of which the defendant, acting reasonably, knew or ought to have known’ about.^[10]
• A director will be required to establish that they took these reasonable steps during the entire period from the due date until the expiry date of the DPN:‘Proof that nothing could have been done at various times during this period would not establish that nothing could have been done at other times. Proof that the person took all reasonable steps at various times would not establish that he or she took all reasonable steps’.^[11]

SGC debt

In the case of unpaid SGC debt, a defence may be available to a director if ‘the company treated the Superannuation Guarantee (Administration) Act 1992 as applying in a way that could be reasonably argued, was in accordance with the law, and took reasonable care in applying that Act’.^[12]

• To establish this defence, the company must have failed to pay an SGC debt/s because the company’s interpretation of the application of the Superannuation Guarantee (Administration) Act 1992 was incorrect but reasonably arguable and the company took reasonable care in applying the Superannuation Guarantee (Administration) Act 1992.
• Section 284-15(1) of the Act states that a matter will be reasonably arguable if it is ‘about as likely to be correct as incorrect, or is more likely to be correct than incorrect’.
• This means that the director’s interpretation of the Superannuation Guarantee (Administration) Act 1992 must have been either about as likely to be correct, or more likely to be correct, than incorrect.

What are the consequences of non-compliance?

If a DPN is not complied with, the ATO may do one of the following to recover the debt:^[13]

• issue a garnishee notice;
• offset personal tax credits; and/or
• commence legal proceedings.

Key Takeaways

As the ATO continues with its efforts to recoup outstanding debts, directors must remain vigilant and proactive in addressing DPNs. By seeking timely legal advice, directors can strategically navigate these challenges with greater confidence and mitigate the risks associated with personal liability for company debts.