The printers at the ATO have been dusted off and are smashing out Directors Penalty Notices or DPNs in record numbers. So, this raises the question… What are the defences available to a director to avoid personal liability under a DPN? Well…the answer depends on the type of DPN issued.
Exploring Different Categories of DPN's
There are two types of DPNs.
1. Non-lockdown DPNs apply when lodgements were made with the ATO within the required submission period, but the debt amounts remain outstanding. A director can avoid personal liability by doing one of these four following actions within 21 days of the issue date:
1.1 Arrange for the company to pay the amount owing under the DPN;
1.2 Appoint a Small Business Restructuring Practitioner (SBRP);
1.3 Place the company into Voluntary Administration; or
1.4 Place the company into liquidation.
2. Lock-down DPNs occur whenever a quarterly BAS lodgement has been made outside the required submission time frame. Receiving a Lock-down DPN means that a director cannot avoid personal liability by putting the company into liquidation or administration or appointing an SBRP. If a director is issued a Lock-down DPN, they must arrange for the amount to be paid or rely on one of the available defences.
Defences to DPN's
Put simply, there are two defences to personal liability from a DPN. They are:
2. Reasonable Steps
The Defence of Illness
It is a defence to a DPN if, because of illness (or other good reason), a director could not take part in the management of the company. It should come as no surprise that this defence is very difficult to achieve. The bar is set very high.
Firstly, the onus is on the director to prove the defence. Secondly, the ‘good reason’ needs to be judged objectively. So, a good reason is weighed up against a director’s duty to participate in the management of the company. A director is not entitled to simply choose not to participate.
A director who is inattentive to the company’s affairs, or who chooses to leave the management of the company to others, would not have a valid defence. The director must be ill from the first deduction day to the end of the period specified in the notice. That is, the director must be ill for the entire time and not just part of the time.
If the defence is successful, the director is not responsible for the company’s default.
The Defence of Reasonable Steps
As with the illness defence, the onus is on the director to prove it. In challenging a DPN using this defence, a director must show that they took all reasonable steps to ensure that one of the following happened albeit unsuccessfully for whatever reason:
o paid the amount outstanding; or
o appointed an administrator, SBRP, or liquidator.
Again, the word ‘reasonable’ suggests it is an objective test. Therefore, it is for the court to decide whether a reasonable director would have taken the same steps.
Key Take Aways
1. Directors must bear in mind that they can’t just leave the affairs of the company to others or choose to participate in managing the company for only part of the time when it suits them; and
2. Directors must make sure that they are fully informed of the company’s financial position and its tax lodging obligations.
Failure to do so will make it very difficult, if not impossible, to defend to a DPN. At a bare minimum, ensure that BAS and Super Guarantee Charge Form lodgements are on time so that if you or your client receive a DPN, you can take the necessary steps to avoid personal liability for any DPNs that may be issued.
If you or your client receive a DPN, please do not ignore it. It won't go away. Contact us to discuss your options. de Jonge Read may be able to help to ensure that personal liability, penalties and interest, wherever possible, are avoided.
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