Timing is everything in DPN action matters

It considers early intervention, the treatment of continuing DPN liabilities following formal restructuring, administrative accuracy, and transparency. This includes issues impacting newly appointed directors, and the practical operation of safeguards for vulnerable and/or coerced directors.

“DPNs are an important revenue protection and compliance mechanism,” the submission said.

“Given the significant personal liabilities directors can incur under the regime, the way DPNs are administered can also affect when directors seek advice and whether viable restructuring or orderly insolvency options remain available.”

As such, ARITA, which represents professionals who specialise in the fields of restructuring, insolvency and turnaround, said early intervention and whether DPNs are issued and communicated in a way that encourages directors to act while meaningful options remain is critical.

Under Division 269 of Schedule 1 to the Taxation Administration Act 1953 (TAA), directors can become personally liable for penalties that match the company’s unpaid PAYG withholding, GST, and superannuation guarantee charge (SGC) liabilities or unpaid estimates of those liabilities.

The ATO’s published practice statement says that it will aim to issue a DPN as soon as practicable after a penalty is incurred, and that it recognises that timely issue could spur directors to address a company’s financial difficulties before they become unmanageable.

The director penalty arises under Division 269, while the DPN is the statutory notice the commissioner must provide before beginning proceedings to recover the penalty.

“That timing matters. A director penalty is a personal liability that operates in parallel with the company’s underlying liability,” the submission said.

“If an amount is paid or applied towards one of those liabilities, the other parallel liabilities are discharged to the same extent. As the company’s unpaid liabilities increase, the director’s potential exposure can therefore also increase.”

Timely issuance of the DPN could prompt a director to engage with the ATO, seek advice, tend to reporting and payment obligations, or consider a formal restructuring or insolvency appointment, the submission noted.

“If action occurs only after substantial liabilities have accumulated, the practical options may be materially narrower,” it said.

If DPNs are not issued in a timely manner and restructuring options are reduced, the prospects of sustaining an otherwise viable business, maintaining employment, protecting employee entitlements, and maximising returns to creditors also diminish, ARITA said.

“ARITA does not suggest that external administration is an inappropriate outcome. In some circumstances it is the necessary course,” the submission emphasised.

“The concern is whether avoidable delay in DPN action can mean that a notice operates primarily as a trigger for terminal insolvency, rather than as an effective prompt for earlier action.”

In addition, ARITA urged clear communication around the practical consequences of a DPN, including relevant tax periods, the 21-day statutory period before recovery proceedings may commence, and available statutory defences and the consequences of inaction.

“Clear communication is particularly important because the statutory response period is short and the consequences of inaction can be significant,” the submission stated.

“The practical test should be whether a director receiving the notice can identify the liability, understand the available statutory options and defences, and obtain advice in sufficient time to make an informed decision about both the company and their personal position.”

ARITA also recommended regular publication of DPN activity and outcome data, with measures including DPNs remitted or withdrawn, including notices withdrawn due to error.

It suggested including data on the period between the underlying liability becoming overdue and issue of the DPN, subsequent restructuring, voluntary administration or liquidation, subsequent personal insolvencies of directors, including bankruptcy, and the time taken to resolve disputed DPNs.