We have previously explained about the different types of director penalty notices (DPNs) which can be issued by the ATO here. In summary there are:

  • ‘Ordinary’ or 21-day DPNs where directors can avoid personal liability if the company is placed in liquidation or voluntary administration; and
  • ‘Lockdown’ DPNs where directors will not be able to avoid liability even if the company is placed in liquidation or voluntary administration.

You can also read about the effects of DPNs on directors if they are liable.

Case Study – Directors’ Failure to Lodge SGC Statements

One of our clients was recently issued with a lockdown DPN by the ATO. She was a director and shareholder of a company which operates several hair salons across Queensland. A business partner of hers was the other shareholder and director of the company. The financial management of the company was done by the business partner while our client was running the operations of the business.

The company was, at one point, employing more than 30 staff across the salons they run. Unbeknownst to our client, the superannuation due to staff wasn’t paid by the company for a number of years. Neither were SGC Statements lodged with the ATO to report the unpaid superannuation.

The failure of a company to lodge SGC Statements to report unpaid superannuation within one month of superannuation being due will result in automatic liability for unpaid superannuation on the part of directors. The ATO can issue a lockdown DPN at any time to collect the debts from directors. This was what happened to our client, with the ATO issuing a lockdown DPN to our client, claiming more than $300,000 in unpaid superannuation.

Possible Defences

There are very limited defences available to a director against DPNs. A director may claim that they “did not take part (and it would have been unreasonable to expect [the director] to take part) in the management of the company during the relevant period because of illness or other acceptable reason” as a defence. Our client however could not claim this defence as she had no reasonable excuse to not take part in the management of the company. It was her choice to leave it to her partner.

Outcome

Our client was ultimately liable to for the debt as she had no defence. She could not afford to pay the director penalty debt so her only option was bankruptcy.

How to avoid director penal liabilities?

There are several things that a director can do to avoid DPN liabilities, including our client. From the outset:

  • She should have been more proactive and hands-on in the financial management of the business. She should not have relied blindly on the business partner and trust that he would have complied with superannuation obligations; and
  • She should have ensured that either superannuation was paid or failing which, SGC Statements were lodged on time. SGC Statements are lodged within 1 month from the date superannuation is payable.

In the case of our client, she would have avoided a lockdown DPN had she lodged the SGC Statements. She may have been issued a normal DPN instead, but she could have then avoided personal liability by placing her company in liquidation or voluntary administration. Alternatively, she could have taken advantage of the newly introduced small business restructuring scheme to compromise the ATO debt.

Contact us for assistance

If you or your business are having difficulties paying your tax debts, the professionals at TAX DEBT SOLVED can help with a free, no-obligation consultation, contact us here. It’s now more important than ever to seek early advice about your problems and to consider solutions available.

 

 

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