Director penalty notices (DPN) are a means of collecting tax used by the Australian Taxation Office (ATO). There are strict time limits for compliance, which can be compounded by deregistration. In Re Dreampoint Pty Ltd (Deregistered) [2024] WASC 125 is an example of how this might be dealt with but requires a court application to be brought very promptly.
What is a Director Penalty Notice?
A DPN is a notice issued by the ATO to a company director which, if not complied with, makes the director personally liable for the company’s tax debt. When a company has not paid PAYG withholding tax, GST or superannuation guarantee charge, or kept its reporting up to date, the ATO can issue a DPN. It can even apply to new directors if tax liabilities due before the new director’s appointment are not satisfied within 30 days of the appointment. Compliance with the DPN requires either causing the company to satisfy the tax debt or place the company in external administration (which includes voluntary administration, liquidation or small business restructuring). This must happen within 21 days of the DPN being issued, or the director becomes personally liable for the tax debt. Limited defences exist and must be raised within 60 days of the DPN being given.
What if the Company is Deregistered?
One particularly difficult scenario is when the company has been deregistered. A deregistered company ceases to exist at law. Such a company is not in a position to satisfy the debt or appoint an insolvency practitioner. If a director of a deregistered company receives a DPN, they may be able to act quickly enough to have the company reinstated and placed into external administration.
Case Overview:
In Re Dreampoint Pty Ltd (Deregistered) [2024] WASC 125, the director of a company was issued a DPN by the ATO. The company had been deregistered.
The director promptly brought an application to the Supreme Court of Western Australia for the reinstatement of the company, pursuant to s 601AH of the Corporations Act 2001 (Cth). A director has standing to make such an application if they are a person aggrieved by the deregistration. The court held the DPN was sufficient ground to satisfy this requirement.
The company had debts when it was deregistered so it was appropriate to reinstate the company and appoint a liquidator.
By causing the winding up to be brought about within 21 days of receiving the DPN, the director complied with the DPN.
Caution: Time limits and Legal Advice are Crucial
This strategy may not always work. Liquidation may bring with it other potential liability for directors, depending upon whether they traded the company while insolvent, made payments that could be considered unreasonable director related payments, or otherwise breached directors duties. In the case of Dreampoint Pty Ltd, the director presumably made a cost-benefit analysis with the benefit of legal advice and determined the reinstatement route was preferable to personal liability for the tax debt. There is no single solution for dealing with a DPN, and careful legal advice is important to develop an appropriate strategy fit for each unique situation.
Seeking legal advice immediately is critical if you receive a DPN, particularly if your company is in liquidation. There are strict time limits for compliance, and opportunities to avoid personal liability may be lost if those time limits are ignored.