What’s Mine is Yours: When Company Tax Debts Become Your Liability
In a stark contrast to the relaxed approach taken during COVID-19, the Australian Taxation Office (“ATO”) are now aggressively pursuing the collection of billions of dollars in tax debt owed by small and large companies. One of the main methods being deployed by the ATO to collect company taxes is the issuing of director penalty notices (“DPN”).
What is a DPN?
As a director of a company, you are personally liable for a penalty equal to certain of your company’s unpaid taxes, including:
- Pay as you go withholding (“PAYGW”);
- Goods and services tax (“GST”); and
- Super guarantee charge (“SGC”).
A director’s liability in relation to unpaid company taxes is referred to as a director penalty. When the ATO is attempting to recover company taxes from a director personally, they will give the director a DPN that outlines the penalty amount and how the penalty can be remitted. If the director does not take action to cause the company to pay its debt within 21 days, the ATO can sue the director to recover the penalty amount directly from the director’s personal assets.
It is important to note that there are two types of DPNs, non-lockdown DPNs and lockdown DPNs.
Non-lockdown DPN
A non-lockdown DPN is issued to a director of a company if the business has failed to pay its tax obligations, but has continued to make all lodgements (BAS, SGC, etc) on time.
If a director has a non-lockdown DPN, the notice will give the director the following options to avoid being personally liable for the director penalty:
- Pay the unpaid taxes;
- Appoint a voluntary administrator;
- Appoint a small business restructuring practitioner; or
- Appoint a liquidator.
If a director takes one of these steps in time, the penalty will be remitted, and the Director will be no longer be liable. However, if the Director fails to take one of these steps within 21 days, the Director will remain personally liable for the penalty and the ATO will pursue payment from both the Company and the Director.
Lockdown DPN
A lockdown DPN is issued when a company has failed to meet its tax obligations and also has failed to make all of its tax lodgements. If this occurs, the only way for a director to avoid being personally liable for the director penalty is by paying (or causing the company to pay) the outstanding liabilities. The penalty is ‘locked down’ on to the director. Unlike a non-lockdown DPN, a lockdown DPN cannot be remitted by appointing an external administrator.
What does this mean for directors?
The ATO’s crackdown of company tax debt has resulted in significant pressure on the directors of small and large companies who have substantial PAYGW, GST and SGC liabilities. It has been reported that in the 2023 financial year, the ATO was issuing approximately 150 DPNs per business day to directors of companies, a significant increase from 52 DPNs per business day in the 2019 financial year.
The increase in company tax from the relaxed pandemic debt collection practices and the ATO’s subsequent tougher recovery approach, has been met with an increase in insolvencies. As reported by the Australian Securities & Investments Commission, in the 2024 financial year, 11,053 companies entered external administration or appointed a controller. This is a notable difference to the 8,105 companies in the 2019 financial year.
Existing directors of a company cannot avoid personal liability under a DPN by resigning, and similarly a new director cannot avoid liability 30 days after their appointment. Therefore, the ATO’s crackdown serves as a reminder that it is critical for directors of a company to understand their personal liability in relation to company taxes, and more importantly, understand how these liabilities can be avoided.
Matthews Folbigg Lawyers has a specialist team dedicated to Insolvency, Restructuring and Debt Recovery.
To understand the significance of director personal liability when running a company, please contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au
