Directors – You Have Been Warned! Major Changes to Director Penalty Notices and Tax Collection.

As you would be aware, the ATO put the collection of overdue taxes on ice during the COVID-19 pandemic. However, this is no more and the ATO are once again issuing Director Penalty Notices (DPNs) with some very stringent changes. These changes have been put in place due to the massive $55 billion tax debt the ATO announced in November 2021. Whilst some of these changes apply to everyone, Directors in particular have been squarely put on notice. As such, we have seen an increase in DPNs and Garnishee Notices being issued by the ATO.

The ATO has confirmed that they have sent out 29,552 “awareness letters” to taxpayers for the disclosure of business tax debts and a whopping 52,319 “awareness letters” to taxpayers regarding the use of DPNs, with some 30 to 40 DPNs being issued each day. This significant course of action has been adopted by the ATO as they begin targeting taxpayers that represent higher risk and/or a refuse to engage with the ATO. As such, don’t ignore the ATO! This is expected to see an increase in insolvencies across a wide range of industries, as is evident with the recent struggles of the construction and hospitality sectors.

In the event that a company has an outstanding tax debt or has not met its Superannuation Guarantee Charge, the Director(s) of the company may be issued with a DPN, which makes them personally liable. Traditionally, to avoid personal liability, upon receipt of such a DPN, the Director(s) would predominately choose (of their many options) to enter into a repayment plan arrangement with the ATO. However, this option is no longer available to directors.

This decision clearly mirrors the judgment made in Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5 (7 February 2020).

There are now only four (4) clear avenues to remit a DPN. They are as follows:

• Paying the debt in full;
• Placing the company into administration;
• Placing the company into liquidation;
• Appointing a Small Business Restructuring Practitioner.

These options are likely to lead to an increase in companies being placed into administration or liquidation.

It must be clarified that regardless of which of these four (4) options the Director(s) elect to proceed with, the Director(s) must exercise the option within 21 days of the DPN being issued.

During the COVID-19 pandemic we saw many people leave their positions for various reasons. It is crucial to remember that even if you are no longer the Director of a company you may still be personally liable for a debt that was due prior to your resignation. As such, we seek to remind you of some of the applicable legislation regarding the resignation of a Director.

Section 203A of the Corporations Act 2001 (Cth) is as follows;

‘A director of a company may resign as a director of the company by giving a written notice of resignation to the company at its registered office’.

Section 205A (1) of the Corporations Act 2001 (Cth) is as follows;

‘If a director, secretary or alternate director retires or resigns, they may give ASIC written notice of the retirement or resignation. The notice must be in the prescribed form.’

Section 205B (5) of the Corporations Act 2001 (Cth) is as follows;

‘If a person stops being a director, alternate director or secretary of the company, the company must lodge with ASIC notice of the fact within 28 days. The notice must be in the prescribed form.’

When placing these legislative provisions alongside the ATO’s recent changes, it is clear that there will be an increase in the number of Directors who find themselves in unwanted situations and this may include incurring significant personal liability for the companies’ debts.

Before resignation, any Director intending to do so should also review the company’s constitution and potentially any Shareholders Agreement to identify any applicable duties or obligations placed on them. Further, please note that s203A of the Corporations Act 2001 (Cth) forms part of the “replaceable rules” and as such, depending on the company constitution the company may have contracted out of the replaceable rules and replaced same with the constitution. However, please be aware that unless the constitution is prepared properly, a company can be governed by a combination of the constitution and the replaceable rules.

For those of you who have recently become a company Director, it is crucially important to ensure you have an understanding of how these changes may affect you going forward. If you are a Director we recommend reading the following article regarding Director Identification Numbers as any DPN you receive will be linked with this number.

Applying for Director IDs – Due dates and deadlines

The above information is not exhaustive on these topics and this article is not to be relied on as legal advice. If you have received a DPN, have recently left your position as a company Director and fear you may still be personally liable for company debts, would like further clarification or advice on the changes made by the ATO or otherwise, please reach out to Gavin and the team at Gavin Parsons and Associates on (02) 9262 4471 or at gavin@gpalaw.com.au.