Written by Hiteshi Dekhtawala in September, 2010

Director Penalty Notices (“DPN”) have undergone some significant changes with effect from 1 July 1 July 2010.

The DPN regime will be familiar to many. Just briefly, a Director of a Company that has a tax debt to the Australian Taxation Office (“ATO”) for unremitted PAYG withholdings may be served with a DPN. The aim of a DPN is to enforce a personal liability on the Directors for the unremitted PAYG Withholdings.

In order to understand the recent changes, they will be discussed with further commentary as to how the DPN provisions formerly were administered prior to the new regime coming into effect.

• The most significant amendment is the amount of time in which a Director has to comply with a DPN. The Director is now granted 21 days to attend to the DPN, and the 21 days commences from the time when the notice is posted by the ATO. Under the old regime a Director had 14 days to comply, however the 14 days did not commence until such time as it was deemed to be received by the Director.

• Under the old regime a DPN allowed the recipient to comply with the Notice in four different ways. These were by either paying the tax debt in full, entering into an instalment arrangement or by appointing a Voluntary Administrator or a Liquidator before the 14 days expired.

In accordance with the new regime, the option to enter into an instalment repayment arrangement to comply with a DPN and avoid personal liability has been removed. Now, if a Director who has been issued with a DPN enters into an instalment agreement he or she will simply delay the ATO from commencing the recovery proceedings.

As noted above, the Director has 21 days to comply with the notice.

In light of the amendments, if Directors are to seek to avoid a personal liability for the Company’s unremitted PAYG withholding obligations, they may now only have 3 options within the 21 day notice period, i.e. either pay the full amount outstanding to the Commissioner or appoint a Voluntary Administrator or Liquidator to the Company.

Whilst a Director will not escape personal liability if a repayment arrangement is entered into, the amendments provide that if a repayment arrangement is entered into during the 21 day period and the arrangement is strictly complied with, the Commissioner of Taxation will be precluded from taking enforcement action against the Director whilst that payment arrangement is adhered to.

• Under the new provisions, the ability for a Director to rely on the defence to the DPN that they did not take part in the management of the Company because of “illness or other good reason” has become more difficult as there is now a greater onus of proof on the person seeking to rely upon this defence.

The Director must establish that he or she was ill, or that there was a good reason why he or she did not participate in the management of the Company while the relevant tax liability fell due. In addition, the regime requires the Director to also establish that it would have been unreasonable to expect the Director to have taken part in the management of the Company at that time.

Given the possibility of a vast personal obligation which could be imposed on the Director for failing to comply with a DPN, it is imperative that advice is sought as soon as possible so that appropriate actions may be taken to mitigate the possible personal liability.

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PLEASE NOTE: All information contained in the articles below was correct at time of publishing.