Elections, Debts, and DPN’s

21 May 2022 – Is it the beginning of the end for Australia’s COVID affected statutory collection practices?

This past Sunday morning, the Prime Minister confirmed the worst kept secret in the country, that the federal election was going to be held on 21 May 2022, in line with the requirements of the laws of Australia.

So, what does that mean for business and the light touch statutory debt collection processes that have been with us since March 2020?

In my view, it is the beginning of the end and by the third quarter of this year, businesses will not be able to rely on such a relaxed approach to debt enforcement in this space.

Since the middle of February and more so the beginning of March 2022, the accountants within my network have been receiving calls, sometimes daily, in relation to clients with both large and long term and small and short-term debts from the Australian Taxation Office (ATO) chasing payment. In the last two weeks, I have seen several of the widely reported 50,000 director warning notices that were issued by the ATO and have had several conversations with directors and advisors around those and their options.

There are a few things that make those notices unique.

Firstly, the quantum of the issued notices. I personally am not aware of any other circumstance in my time in the industry that there has ever been that many notices issued warning of the potential for a director penalty notice (DPN) to be issued if an outstanding Company debt was not paid by the due date.

Secondly, several advisors within my network have confirmed that they weren’t issued with copies of the notices as the registered office or appointed representatives of the Company’s to which the debt relates. The notices were issued directly to the company register listed and/or last known personal address of the relevant company director. Only when clients sent copies of those notices to them were they made aware that they had been issued. Whilst it isn’t a legal requirement for the ATO to do so, they often issue notices of this nature to the registered office or tax agent as well.

Thirdly, the notices I have seen to date only appear to relate to Goods and Services Tax (GST) amounts owed by a Company and not Pay As You Go Withholding (PAYGW) or outstanding Superannuation Guarantee Charge (SGC). The option of entering a payment plan, as noted within the warning letters, to avoid receiving a DPN is limited to some but not all statutory debts. It does not stop a DPN from being issued if the debt is in relation to PAYG or SGC.

The ATO can still issue a DPN if these amounts remain unreported and unpaid for more than three months after the due date. Advisors need to understand the distinction here as time is of critical importance in relation to both lodgment and payment to avoid personal liability.

There are two different types of director penalty notices that can be issued by the ATO:

1. A “Non-Lockdown” DPN; and
2. A “Lock Down” DPN.

A non-lock down DPN can be issued in circumstances where:

1. All activity statement lodgments have been made within three months of their due date;
2. All SGC statements have been lodged within a month and twenty-eight days after the end of the quarter that the contributable amounts relate to; and
3. Where those amounts remain outstanding.

A “lockdown DPN” can be issued in circumstances where:

1. Activity statement lodgments have not been made within three months of their due date;
2. SGC statements have not been lodged within a month and twenty-eight days after the end of the quarter that the contributable amounts relate to; and
3. Where the payment requirements have not been met.

The only option for a director who receives a lockdown DPN is to pay the amount listed or rely on any legal defenses to the notice that may be available to them based on the unique circumstances of the Company.

For those that receive a non-lock down DPN, there are several options available to avoid penalty (and personal liability) if they act quickly (within 21 days of the notice), however in an important change, entering a payment arrangement pursuant to section 255-15 in Schedule 1 of the Taxation Administration Act 1953 in no longer one of them.

The following options are available:

1. Company pays the debt owed to the ATO;
2. Company appoints a Liquidator;
3. Company appoints an Administrator; or
4. Company appoints a small business restructuring practitioner

Now with the election called and COVID seemingly moving further into the rearview mirror, there are no more perceived impediments, post 21 May 2022, surrounding the enforcement of the now approximately $60b in collectable debt owed and I suspect whoever wins the election will be tasked with managing that process.