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31 Mar 2022

Director penalty notice regime affected by major change

Directors be aware and beware.

As discussed in our previous On The Pulse articles, most recently in Alex Siu’s “Tax Debts Arising from ATO Audits”, the ATO can issue one of two types of DPN to make a director personally liable for a penalty equal to the value of a company's overdue SGC, PAYG, and GST. These are a non-lockdown DPN, issued when statements are lodged (within three months of the due date) but debts aren’t paid; and a lockdown DPN, issued where statements have not been lodged (within three months of the due date) and debts are unpaid.

However, a major change has resulted from the recent Federal Circuit and Family Court of Australia decision in Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5. It found that entering into a payment arrangement does not cause a tax debt which is due and payable to cease to be due and payable. This negatively impacts the non-lockdown DPN options to remit personal liability.

Directors must consider the other options to avoid personal liability, which include:

  1. To place the company into liquidation.

  2. To place the company into administration.

  3. To appoint a small business restructuring practitioner and commence the small business restructuring process.

  4. For the company to pay its debt obligations to the ATO in full.

To comply, directors must action one of the above options within 21 days of the date on the non-lockdown DPN. With the low likelihood of companies in financial difficulty being able to fully fund their debt within this period, we fully expect this change to increase the number of formal appointments we see this year as directors are forced to decide to restructure or end their company’s operations.

Is this change a good thing?

This change makes a payment arrangement with the ATO a far less palatable option and effectively provides clients with less options available to them when they receive a non-lockdown DPN from the ATO. It also creates a greater risk of clients becoming personally liable for ATO debts without being aware that they have taken on that financial exposure.

Should your client be behind in their ATO obligations and be at risk of receiving a non-lockdown DPN, please contact your local Worrells contact. We’re here to help and timely action in these situations is key to avoiding financial penalties.

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