Just lodging isn't enough to avoid a DPN

As many readers will be familiar, a Director Penalty Notice (“DPN”) is a notice from the ATO that pierces the corporate veil and places personal liability on a director for unpaid company tax debts.

This can include PAYG, GST, and Superannuation Guarantee Charge liabilities of the company. The commonly phrased warning to directors is to make sure that they complete their tax lodgements on time to avoid personal liability. Generalisations and common phrases are useful to simplify and communicate concepts and ideas, but they can be misleading and result in issues if the specific details aren’t reviewed and properly considered.

As a reminder regarding DPNs, there are two types:

• Non-lockdown DPN; and

• Lockdown DPN.

A non-lockdown DPN arises if the company has properly reported its tax liabilities. The ATO may then issue a DPN letter providing the directors with 21 days from the date of the notice to undertake an action to avoid personal liability, which can include appointing an External Administrator.

A lockdown DPN however, arises if the company fails to report and pay its tax obligations on time. A lockdown DPN arises automatically by law, and the directors become personally liable as soon as the stipulated lodgement deadlines lapse. There is a general misunderstanding, however, that directors should ensure lodgements are completed on time to avoid personal liability, but this is not entirely correct.  

The source of the misunderstanding can be found in the legislation itself. Using PAYG as an example, the actual wording of s269-30 of Schedule 1 of the Taxation Administration Act 1953 is as follows:

“…the directors stop being under the relevant obligation after the last day of the 3 months after the due day, subsection (1) does not apply to the extent the company does not, on or before the last day mentioned in column 2, notify the Commissioner:

(a) under section 16‑150 of the amount the company is obliged to pay;”

As can be seen, the mere lodgement of an Activity Statement does not avoid a lockdown DPN; the lodgement must also notify the correct amount to the Commissioner.

This critical distinction has come up on a few matters recently, where the directors had arranged for the Activity Statements of the company to be lodged on time and believed that they had avoided personal liability. But on review, they had inadvertently underreported the amount of the tax liability on a number of Activity Statements. As the underreported tax liabilities were not “notified to the Commissioner” by the due dates, the directors became personally liable for those amounts via a lockdown DPN. The directors were not trying to hide the liability; it was a genuine error arising possibly as a result of rushing to complete the lodgements on time.

The key message for directors and their advisers is clear, timely lodgement is only part of the compliance obligation. Directors must also ensure that the amounts reported are accurate, as an underreported liability may still give rise to a lockdown DPN, notwithstanding that the relevant lodgement was submitted on time.

For more information on DPNs, download our DPN booklet.