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Director Penalty Notices and their effect on Financial Advisers Posted on October 9, 2018
The Director Penalty Notice
The ATO has introduced the new “lockdown” DPNs to distinguish between two types of Director Penalty Notices. The main difference between lockdown DPNs is that directors cannot avoid payment of the debt under a lockdown DPN by placing the company into voluntary administration or liquidation.
Under the new lockdown DPN regime, where PAYG or Superannuation Guarantee Charge (SGC) liabilities are unpaid and unreported within three months of the due date, the director becomes automatically personally liable for these debts. In order to pursue recovery of this amount, the ATO is required to issue a lockdown DPN. The only option available to directors after the automatic personal liability is triggered is to pay the debt or enter into personal insolvency.
A lockdown DPN can also be issued at any point, irrespective of whether the director has already placed the company into liquidation or voluntary administration.
This new regime is in contrast to the non-lockdown DPN notices which may be issued by the ATO when Business Activity Statements or Instalment Activity Statements have been lodged but remain unpaid. In the event of a non lockdown DPN being issued, the director can avoid personal liability by placing the company into liquidation or voluntary administration within 21 days of the date of the notice.
The most important aspect to remember is even in the event that the debt cannot be paid on time, returns should be lodged within three months of the due date of lodgement to avoid the automatic personal liability.
Potential risks to FInancial Advisers and Tax Agents
With the Government cutting costs and looking to raise revenue, the ATO are becoming more aggressive with issuing lockdown DPNs.
In circumstances where the director becomes automatically personally liable for unpaid and unreported PAYG or SGC, it is conceivable that he or she will look to his or her advisors to wear, or share, that liability and seek to join the advisor as a cross-claimant in the proceedings. This is particularly so given the limited nature of defences available to a director. To succeed on a defence, the director must prove that he/she has done everything possible to avoid or pay the liability, or must have a very good reason for not taking part in the management of the company.
Given that all tax agents or financial advisers have professional indemnity policies, they will be an attractive target for spreading the liability that has arisen under a lockdown DPN. The director may seek to claim that the advisor was negligent in failing to advise him or her of the nature of the lockdown of DPNs and the fact that personal liability could not be avoided once the relevant dates for reporting and remitting the tax liabilities had passed.
Avoiding the risk
Failure to advise directors of their outstanding lodgments and the consequences of DPNs arising out of non-reporting and/or non-payment of PAYG or SGC therefore clearly exposes financial advisers and tax agents to a genuine risk.
In order to potentially minimise this risk, it is recommended that financial advisers and tax agents take some basic early action to put clients on notice of the implications. We suggest preparing a pro-forma notice, to be provided to all clients, outlining the following points:
Directors are held automatically personally liable where PAYG and SGC remain unpaid and unreported three months after the due date. The ATO will need to issue a “lockdown DPN” to directors in order to pursue this debt. The only option is to pay the debt.
The ATO can enforce its rights on lockdown DPNs from previous years, thereby backdating the director’s personal liability for existing PAYG and SGC debts if the amounts are already unpaid and unreported for three months after their due date.
It is particularly important that all returns are lodged within three months of the due date.
A director may face a non-lockdown DPN in the event that BAS or IAS have been lodged but remain unpaid. A director may place the company into voluntary administration or liquidation within 21 days of the non-lockdown DPN being issued to avoid personal liability.
The obligation to lodge all returns within the three month window rests with the director and the advisor is not responsible but will assist, if requested.
Finally, if you operate as a company tax agent and receive company taxation notices, including DPNs addressed to the director, you should ensure you provide these notices, together with the abovementioned notification about the personal consequences for failure to comply with the DPN.
It is impossible to guarantee that potential liability can be avoided by providing a notice such as the above, but taking pre-emptive action can reduce potential risk considerably, particularly where you have clients that you suspect are in financial difficulty.