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How to respond to an ATO Director Penalty Notice

With tax time approaching and the economy faltering, SMB owners need to be aware of their liabilities and duties in their role of company director. A struggling company can quickly become a serious liability, and the flow-on effects can impact on a director’s personal assets. Here’s a look at one way a director can become liable and what can be done to avoid it.

A Director Penalty Notice is issued by the Australian Taxation Office to directors of companies that have outstanding PAYG taxes. Normally, the ATO will not issue a Director Penalty Notice (DPN) before numerous attempts to recover the debt have been made and failed.

The issue for a company director lies in the fact that if they receive a director penalty notice they have only 21 days to act before becoming personally liable for the debt. If a director does not act on a DPN, the ATO will be able to come after the directors personal property, including houses, shares or any other assets, to recover the debt.

Obviously this is a scenario that most directors want to avoid. Here are the only three ways to avoid it:

  1. Pay the debt
  2. Appoint a voluntary administrator
  3. Appoint a liquidator

There are no other options if you want to avoid personal liability, and no extensions to the 21 day window to act. The ATO also offers for companies to enter into an agreement to repay the amount in installments. Whilst this appears to be an attractive option, entering into such an agreement will make a director liable should the company fail to keep up with the agreement, so careful consideration must be made before taking this path.

Option number one – paying the debt is only advisable if the director is certain the company will remain solvent for the foreseeable future. Any payment made to the ATO prior to a company being liquidated can be clawed back by a liquidator should it be determined that it was a preferential payment at the expense of other creditors. If a debt is recovered by a liquidator from the ATO, the ATO will attempt to recover those debts from the director again, even though the company might be personally liable.

This leaves options two and three , entering into voluntary administration or liquidation. These may seem excessive, but if a company has reached the point of receiving a DPN, it is probably in real financial trouble and these options need to be look at carefully.

It is unfortunate that directors of companies often have to take these steps but, as the economy struggles, it is something that all entrepreneurs and company directors need to be aware of. The specific solution for any case will of course vary, but if a director receives a DPN they really need to act fast to avoid becoming personally liable.