Fact v Fiction; Changes to Director Penalty Notices

The landscape for Director Penalty Notices (DPN) has moved over the last 12 months and many advisors have been confused by mixed reports on “what changes were proposed”, what was actually “implemented” and what is included in the “ongoing debate”.

A director has a requirement to ensure that their company meets its obligation to remit PAYG Withholding amounts to the Australia Taxation Office (ATO). If the company fails to remit a PAYG Withholding amount by the due date, the director can become personally liable for a penalty equal to the unpaid amount. This occurs under the DPN regime, which remains a powerful weapon available to the ATO in the battle to collect overdue debts.

Under the old system, in order to avoid a personal liability directors issued with a DPN had just 14 days to respond in one of the follow ways:

1. Pay the debt;
2. Enter into a payment arrangement
3. Place the company into Liquidation
4. Place the company into Voluntary Administration

In November 2009 Treasury released a discussion paper with a number of proposals aimed at curbing fraudulent phoenix activity, which they estimated had cost the Australian economy $600 million. Some new changes were given effect on 1 July this year and the current government made pre election commitments for further reform, however many of the proposals remain as topics in an ongoing debate.

The below table summarises the state of play:

Treasury Proposal (November 2009)	New Changes (effective from 1 July 2010)	Ongoing Debate
DPN Regime:
Remove the ability for a director involved in Phoenix activity to avoid personal liability by appointing a Liquidator or voluntary Administrator	Not Implemented	Yes
Expand DPN’s to include Superannuation liabilities	Not implemented	Yes – prior to re-election the Australian Labor Party said they would change the law to  include DPN’s
Expand DPN’s to include other direct and indirect taxes	Not implemented	Yes
Deny PAYG credits to directors against their own income where amounts withheld by the company have not been remitted	Not implemented	Yes – prior to re-election the Australian Labor Party said they would change the law to Deny these credits
Not included in the Treasury proposal	Change the notice period for response from 14 to 21 days	No – already implemented
Not included in the Treasury proposal	Remove the ability to enter into a payment arrangement to avoid the director penalty	No – already implemented
Not included in the Treasury proposal	Not implemented	Automatically issue DPN’s after 3 months - prior to re-election the Australian Labor Party said they would change the law to remove any “grace period” by automatically releasing DPN’s after 3 months
Additional Measures:
Ability for the ATO to require a company to pay a security bond	Yes	No – already implemented
Restricting the use of similar names in new companies  to discourage Phoenix Companies	Not implemented	Yes
Widening the scope for disqualifying directors and issuing penalties	Not implemented	Yes

For further information please contact Brad Tonks on (02) 8346 6000 or email btonks@lawlerpartners.com.au