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As the ATO increases activity around the issuing of DPNs in 2022, it’s important to be aware of your rights and obligations in relation to tax debts.
Frank Lo Pilato, Restructuring and Recovery Partner and Managing Partner based in Canberra, provides some general insights in relation to Director Penalty Notices (DPNs).
We hope you find these FAQs helpful. If you are concerned about mounting debts and need support to understand your individual options, reach out to our experienced team for a confidential, free initial discussion.
Q: What is a Director's Penalty Notice?
A: A Director penalty notice (DPN) is a notice from the ATO that allows them to recover a company's unpaid amounts.
The notice outlines the unpaid amounts and remission options available to you. The ATO can recover the amounts of the director penalty by:
- Issuing garnishee notices
- Offsetting any of your tax credits against the director penalties
- Initiating legal recovery proceedings against you to recover the director penalty.
Q: Is there only one type of DPN?
A: No, there are two types of DPNs that can be issued by the ATO to a director:
- A Lockdown DPN
- A Non-Lockdown DPN.
To understand the difference between the two types of DPN, read the latest blog post from Reginald Kuek, RSM Principal, based in Perth.
Q: What should I do if I receive a DPN? What are the options?
A: “It’s important to be proactive and explore your options early. Speak to your trusted advisors, including your Accountant.
Consider questions like: Do I have the capacity to make a repayment to the ATO? If I can’t commit to a repayment plan, what other options do I have?
You should be aware of personal liability implications too, as a company debt can in some cases, become a personal debt that directors are liable to pay.
If your company is struggling and you feel you are constantly putting out financial spot fires...while a bushfire is raging, voluntary liquidation may be an option that should be considered. In some cases it can ensure debt is attributed to the company, allowing directors to avoid personal liability,” Frank said.
Q: What happens if you don’t pay back the ATO?
A: “We suggest you engage with the ATO - don’t put your head in the sand and let the situation escalate. Chances are the ATO will be more receptive if you are proactive in your contact with them, rather than waiting to be tapped on the shoulder,” Frank said.
The ATO will charge interest on your unpaid amounts, contact you soon after the repayment due date and use any future refunds or credits to repay the amounts you owe. The ATO may also take stronger action if you are unwilling to work with them to address your debt or repeatedly default on agreed payment plans including, in some cases, taking legal action to recover outstanding tax and super debts.
Q: Can I borrow more money to create a payment plan with the ATO?
A: “Everyone’s situation is different. We do know that across the board, lending conditions are starting to get tighter, so it may be more difficult to access additional funds.
I think it’s important to understand your options and have a clear business plan before considering taking on more debt. If you are already struggling with current debt levels, borrowing more money can be a bandaid solution if there aren’t confirmed income streams that will cover existing and new debt repayments,” Frank said.
Q: Why do people risk personal liability by not responding to the ATOs deadline on a DPN?
A: As a company director you become personally liable for your company's unpaid amounts of pay as you go withholding (PAYGW), goods and services tax (GST) and super guarantee charge (SGC). Typically directors will be notified that the ATO is considering issuing them with a DPN, which makes them personally liable for the debts of their business if the company does not actively manage their debt.
“In my experience, directors often risk personal liability because they believe they can turn things around over time. Unfortunately that’s not always the case and they can end up increasing their debt levels and moving from company liability territory to personal liability. That’s when personal assets, like the family home, can be at risk.
Business is personal. It’s often not just a job to people - it's their livelihood, their cash flow to cover expenses for their family, it’s part of their identity. It can often be very hard for people to close a business - even when it’s losing money,” Frank said.
An anonymous, construction client example:
“A recent client who is a service supplier in the construction sector is losing money week after week and has a mounting ATO debt, but is reluctant to commence the voluntary liquidation process.
He still has some project work in the pipeline and would prefer to try to make a repayment arrangement with the ATO than stop running the business. It’s all he knows. He doesn’t know what he would do next,” he said.
We understand it can be really tough to pick up the phone and ask for help, but it’s critical for people in financial difficulty to understand their options. If we can save their business, we will - but we never make false promises,” Frank said.
Q: What are the risks in trying to carry on operating if debts are mounting?
A: “Debt levels can get deeper, directors can become personally liable, relationships and reputations can be burnt. It’s best to be open and honest about debt issues with people or organisations that are impacted, for example the ATO, suppliers, creditors, business partners, and even family members.
Covering up financial problems and allowing a situation to get worse, rarely ends well in my experience. It’s best to reach out early - before financial concerns become serious financial issues,” Frank said.
Take back some control, understand your options
Start a confidential, free conversation with our RSM Restructuring and Recovery team on 1300 263 816 today or find out what your options are here.