Director penalty notices: E-Alert August 2010

The Tax Laws Amendment (Transfer of Provisions) Act 2010 was given  Royal Assent on 29 June 2010 and makes some important changes to the director penalty notices (DPN) regime.

In keeping with objectives of Divisions 9 and 10 of Part VI of the Income Tax Assessment Act 1936, the amendments are aimed at ensuring that directors are  complying with the requirement to ensure that a company either meets its obligations with respect to PAYG taxation or, if it cannot make the requisite payments, that the company is promptly placed into external administration. A DPN will therefore typically be served on a director in situations where the company has fallen behind in payment of its PAYG obligations and often where there is also enforcement action being taken against the company such as service of a statutory demand or an application for winding up.

Failure to comply with a DPN has significant consequences for directors in that they will become personally liable for the company's outstanding PAYG and any penalties if the DPN expires without the director complying with one of the prescribed ways in which a DPN can be satisfied.

The key features of the amendments in relation to DPNs are as follows:

• A DPN now takes effect 21 days from the date that it is posted to a director, rather than 14 days from the date that it is received as was previously the case.  It is therefore very important that directors do not leave it until the end of the 21 day period to seek advice on a DPN as all of the ways in which a DPN can be satisfied will take time to put in place.
• The ATO is entitled to rely on ASIC records to obtain a director's address, the onus therefore being on directors to ensure that ASIC  records are kept up to date.
• There is now a limit of  3 ways in which  directors  can be relieved of their obligations under a DPN, these are:
  • by the company paying the tax obligation;
  • by appointing a voluntary administrator to the company; or
  • by commencing a winding up of the company.
• The company entering into an instalment arrangement with the ATO will no longer constitute an end to a director's obligations under a DPN.  However, the ATO cannot commence or take any further steps in existing proceedings against the director whilst an instalment arrangement is in force and being complied with.
• There  are also changes in relation to the defence  that is currently available to directors on the basis that the director "was not taking part in the management of the company as a result of illness or some other good reason".  Under the amended provisions, a director must now also establish that such illness or other good reason "meant that it would have been unreasonable" in those circumstances to expect the director to take part in the management of the company. 

The amendments took effect on 1 July 2010 and apply to obligations both before and after 1 July 2010.

For further information please contact Chris Kinsella, Marelda Hibberd or Anna Tang.