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DPNs – What you need to know and avoiding personal liability

Joshua Peters, Assistant Manager

A director penalty notice, or DPN for short, is one of the favourite tools of the Australian Taxation Office (“ATO”) when it comes to pursuing directors. However, DPNs often come as a surprise to directors trying to maintain their business in the post-pandemic economy. DPNs are especially important to understand now that the ATO has recently awoken from its COVID slumber and is issuing some 120-150 DPNs daily as of August 2022.

The DPN regime makes directors personally liable for a company’s tax debts for PAYG, GST, Luxury Car Tax, Wine Equalisation Tax, and superannuation guarantee charge (SGC) debts. This exposure however only occurs after the time period set in the DPN has passed.

What sort of DPNs can be issued?

In general, there are two types of DPN that can be issued: non-lockdown, and lockdown DPNs. As suggested by the name there are additional options for directors available in the non-lockdown DPN scenario. These options include:

• Paying the amount in full; or
• A formal insolvency appointment including small business restructuring, voluntary administration, or liquidation. Directors can receive a non-lockdown DPN in relation to debts arising from tax lodgements lodged within the timeframes required by the ATO.

However, directors need to immediately consider their options when receiving a non-lockdown DPN as the above options must be exercised within 21 days of the date of the DPN notice to have effect. This is a critical concern for a director as the 21 days starts from the date of the notice not the day the notice was received. The ATO is also not required to ensure the director is aware of or has received the DPN as their only requirement is to issue the DPN is to the address on the Australian Securities and Investments Commission (ASIC) record for each director. As such director’s should also ensure that the information recorded on ASIC registers is up to date so that they receive any important documents within the required timeframes.

Lockdown DPNs however provide only one option for directors to avoid personal liability. Once a lockdown DPN has been issued, the only way for the director to avoid personal liability is for the company to pay the debt, provided that no defences are available to the director. These DPNs however are only issued when certain returns have not been lodged within the required timeframes.

What to do after receiving a DPN

While receiving a DPN is a worrying situation there are options available for directors to mitigate personal exposure for company tax debts. There is also support available for you to get appropriate advice on turning the situation around or guiding you through the insolvency processes. Regardless of whether the company can pay its tax debts, directors should ensure that the company’s taxation lodgements are lodged within the prescribed timeframes to avoid a lockdown DPN.

Directors and their advisers need to be aware of the implications of DPNs and how to deal with them to avoid personal liability. The company’s commercial options and viability often require substantial consideration, before deciding on the appropriate option and solution.

In certain circumstances, there could be defences to DPNs or defects. It would be wise to seek advice to consider if there are any such options. For example, is there sufficient evidence of ill health to demonstrate that the director could not fulfil properly their role and functions.

Consider the options

When considering how to deal with a 21-day DPN, directors should consider the future viability of the company and determine if

• The Company can prevail through the circumstances, satisfy the DPN liability and be able to operate productively and profitably in the future after considering all relevant factors and risks; or
• There is the reality that the company will continue to decline, not be able to satisfy the DPN debt as well as other creditors and possibly incur trading loses in the future.

If the business is deemed to not be viable in its current structure and financial position then a liquidation, small-business restructuring appointment or voluntary administration of the company may be the most feasible option.