What is a Director Penalty Notice and how can it make you personally liable for company debts? In this essential episode, Darren Vardy explains the ATO's powerful enforcement tool that gives directors just 21 days to act or face personal liability for unpaid PAYG, GST, and superannuation. Learn the critical difference between standard and lockdown DPNs, discover the three options available to avoid personal liability, and understand why the DPN regime was created in 1993. Darren reveals the importance of keeping ASIC records current and shares practical strategies for directors to protect themselves from unexpected personal exposure.

KEY TOPICS COVERED:

• What Director Penalty Notices (DPNs) are and how they work

• The three options to avoid personal liability within 21 days

• Standard DPNs versus lockdown DPNs - critical differences

• What debts are covered: PAYG, GST, and superannuation

• The history of the DPN regime since 1993

• Joint and several liability for multiple directors

• Why ASIC address records are critically important

• The 30-day grace period for new directors

• Resigning as a director doesn't eliminate liability

• How to avoid receiving a DPN in the first place

KEY TAKEAWAYS:

✓ Directors have only 21 days from the date of a DPN to avoid personal liability

✓ Three options exist: pay the debt, arrange a payment plan (with personal guarantee), or appoint an external administrator

✓ Lockdown DPNs have no 21-day grace period and can only be resolved by paying in full

✓ Lockdown DPNs are issued when BAS/IAS returns aren't lodged within 3 months of due date

✓ Superannuation debt falls under the lockdown DPN regime automatically

✓ Joint and several liability means the ATO can pursue any director for the full amount

✓ New directors have 30 days to do due diligence but remain liable for past non-lodgements

✓ Resigning as a director doesn't eliminate liability for debts incurred during your tenure

✓ The easiest way to avoid a DPN is to lodge returns on time, even if you can't pay immediately

Who Should Listen: Business owners, company directors, lawyers, accountants, and anyone wanting to understand financial distress warning signs.

About the Host:

Darren Vardy - Managing Director of Insolvency Options and Registered Liquidator with over 30 years of experience in business recovery and debt solutions. Darren has helped thousands of businesses and individuals navigate financial distress and find practical solutions to complex problems.

Connect With Us:

• Website: insolvencyoptions.com.au  • Phone: 1800 463 328 • LinkedIn: https://www.linkedin.com/in/darrenvardy/

Subscribe & Follow:

Don't miss future episodes! Subscribe to i.O. - Insolvency Options

Like this episode? Please leave a review and share with colleagues who might benefit from these insights.

Co-host: Anthony Perl

Produced by: Podcasts Done For You

Anthony Perl: 00:00:02

Director penalty notices, understanding your personal liability.

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: 00:00:07

Welcome to IO Insolvency Options

with Darren Vadi, the Managing

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Director of Insolvency Options and

a registered liquidator with over

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30 years of experience helping

businesses and individuals.

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Financial challenges.

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In today's episode, Darren Demystifies,

director penalty notices or D pns,

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and reveals how these powerful a TO

enforcement tools can make directors

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personally liable for company

tax debts within just 21 days.

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He explains the difference between

standard and lockdown D pns.

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The three options available to

avoid personal liability and

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why keeping your ASIC records up

to date is absolutely critical.

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You'll learn about the history of the

DPN regime, what debts are covered,

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and the crucial steps every director

must take to protect themselves.

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I'm your co-host, Anthony Perl.

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Let's dive into unlocking

more about insolvency options.

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Well, Darren, welcome and I wanna

ask you a question that I hear this

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terminology being thrown about a

little bit from business owners.

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I hear this terminology of A DPN.

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Can you tell me a little bit more about

what that actually is and what it means?

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Darren Vardy: Sure.

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So the terminology DPN

is short for director.

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Penalty notice and a director

penalty notice is a debt recovery

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document issued by the Australian

Taxation Office for outstanding debt.

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In relation to generally GST and or PAYG,

where if left unresolved, a director

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can be made personally liable if they

don't take certain action within 21

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days from the actual date of the notice.

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Anthony Perl: Okay, so quite

a serious thing to understand.

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So I mean, I guess the first

thing is, is what is the immediate

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action that they need to take?

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Darren Vardy: Sure.

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So within that 21 day period,

there are generally three different

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types of action that can be taken.

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The first action is pay the debt,

which is pretty common sense.

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One would suspect the second

action is to come to a payment

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arrangement with the A TO.

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Now the HEO do allow companies to

enter into payment arrangements

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to repay debt, and therefore

they will allow the directors to

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enter into a payment arrangement.

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In respect to any director penalty

notice amount, however, the A TO

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usually requires a personal guarantee

from the directors for any payment

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arrangement entered into in regards

to director penalty notices and.

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The other way of avoiding personal

liability or the third option available

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is to appoint an administrator,

an external administrator.

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Now, that external administrator

could be the appointment of

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a voluntary administrator.

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It could be the appointment of a small

business restructuring practitioner, or it

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could be the appointment of a liquidator.

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Anthony Perl: Okay.

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So just briefly before we get more

into that, just tell me what the

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difference is between those three.

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Sure.

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Darren Vardy: So with a voluntary

administrator, generally

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that is a precursor to a

deed of company arrangement.

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So it's a, a mechanism within

the Corporations Act that

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allows companies to avoid.

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Liquidation by virtue of the proposal

of a deed of company arrangement

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whereby they can repay their creditors,

maybe not necessarily in full,

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but in part over a period of time.

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And that is one way to avoid liquidation.

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Not dissimilar to that,

is the small business.

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Restructure.

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These are for, as it indicates, small

businesses where their liabilities

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are less than a million dollars.

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Uh, however, they must ensure that

their superannuation obligations

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are up to date and all their

lodgements are up to date Also.

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As I said, again, that is another

way, another mechanism of avoiding

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liquidation, which is finality.

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Anthony Perl: And I guess

all of this happens in a very

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short period of time, right?

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Because I mean, 21 days

is not particularly long.

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I mean, if the debt's a few hundred

dollars, not a big deal, but I gather

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that what we're talking about here

quite often is a significant amount.

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Darren Vardy: Yeah.

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Look, quite often we are dealing with.

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Amounts that have been

accruing over a period of time.

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There may have been previous payment

arrangements, company payment arrangements

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in the past that have been defaulted

upon, and therefore the a TO has.

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Effectively in its view provided plenty

of opportunity for the company to remedy.

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Its its issues and they've issued

the director penalty notice against

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a director as a manner of enforcement

to show the seriousness and to try

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and force the director to act in one

way or another to resolve the issue.

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And as you say, you know

it, it is a 21 day period.

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From the date of the notice with

which the director needs to act.

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So therefore, you know, any director

should really seek advice swiftly

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to understand the financial position

of the company and the options

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available, albeit repayment.

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Payment plan or appointment

of an external administrator.

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Anthony Perl: And I guess one of

the things to be aware of in this

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situation is that many businesses don't

necessarily have too many directors.

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They might actually only

have a sole director.

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So it might be the business owner

themselves who in the middle of

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all of this, this is correct.

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Yes,

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Darren Vardy: yes.

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But sometimes, you know, there

may be, traditionally a lot of the

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older companies may still have.

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Two directors, your husband

and wife and the like.

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So when you look at a director penalty

notice, a director penalty notice can

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be issued against either director.

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The director penalty notice is

a joint and several liability.

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So when we look at the liability

of the directors, the taxation

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office will look at recovering

from either director the amount.

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Which is noted in the

director penalty notice,

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Anthony Perl: and I wonder if people

think about that possibility when they're

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going into, you know, creating this

company structure in the first place.

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Whether there's a, the advantages

and disadvantages of having a

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husband wife combination, for

example, as being the directors.

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Darren Vardy: I think in recent years,

almost probably decades, with the changes

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in the Corporations Act to allow sole

director companies, we are often finding

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that the traditional two director,

husband and wife type companies have

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not been used as much in recent times.

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So yes, we have seen a change

in, you know, who is the director

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of the company, as well as how

many directors are acquired.

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Anthony Perl: Yeah, I suppose that,

does that put the legal onus in a

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different place then, if that the

possibility of separating those two

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enables certain things to be attached

to one partner and certain things to

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be attached to the other, I gather?

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Darren Vardy: Yes, correct.

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And particularly where, you know, the

spouse or a spouse may not necessarily

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have any day-to-day involvement with.

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The company, however, the obligations

and the duties of a director if appointed

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as a director can be quite onerous, and

the spouse who is not actively engaged

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in the actual company can still be held

liable for various obligations such as tax

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debt, and potentially insolvent tracking.

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Anthony Perl: So tell me a little

bit more about the history of

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the director penalty notices.

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I mean, have they been around a long time?

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These things that people

should know about?

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Darren Vardy: So, believe it or

not, the director penalty regime

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has been around since 1993.

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I actually had been in the industry

for four years at that point in time.

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So I saw the whole rolling of the.

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What was called the voluntary

administration regime that was introduced,

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which has been updated throughout time.

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Um, but at that, prior to that point

of the introduction of the voluntary

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administration regime, the tax

office held a priority over repayment

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overall, other creditors, employees,

and ordinary unsecured creditors.

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So.

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As part of the research at the time, the

government was looking at what type of

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regime can we put in place to enable.

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These companies to restructure and

not simply just fall into liquidation.

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Having conducted their research,

they then determined that they would

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need the Australian Taxation Office

to be on side with the restructure.

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And the only way that they could do that

is if the Australian Taxation Office

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relinquished their priority status and

became an ordinary, unsecured creditor.

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However.

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It was the tax office was unable to vote

on a restructure and have, have voting

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rights as an ordinary unsecured creditor.

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Now, given that the a TO would

essentially be giving up this

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priority position, they required a

mechanism to enable the recovery of.

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Certain company tax liabilities such

as, well, back in the day it was

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called group tax, but such as PAYG

withholding tax obligations and the like.

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Now with that, the director penalty

regime was spawn to enable it to have a.

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Far greater ability to pursue debt owing

and really focus the directors on the

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task at hand, which was stop the ever

accruing debt owing to the tax office

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and to organize a repayment of saying,

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Anthony Perl: and if there are

other debts and things in place.

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Is this getting a priority

and what does it cover?

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: 00:10:19

Darren Vardy: So the other debts

that are in place, the director

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: 00:10:22

penalty notice, that is covers

as I indicated, unpaid, PAYG.

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It now covers GST, unpaid GST and also

covers the payment of superannuation.

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: 00:10:34

Anthony Perl: So there's a, a

fair onus on everyone to do that.

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I think superannuation is the

interesting one here as well, isn't it?

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Because that's become much more of an

obligation and perhaps wouldn't have

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expected that that was covered under this.

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Darren Vardy: So the A TO has the ability

to issue a direct penalty notice in

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respect to outstanding superannuation.

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Outstanding superannuation is

still afforded a priority over

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ordinary unsecured creditors.

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It has the highest priority

alongside wages in respect to

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the priority of repayment and.

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Quite often like tax when a

business's cash flow starts to suffer.

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It's not the superannuation funds that

are knocking on the door of the business

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to make sure payment happens as and

when the trade creditors are generally

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knocking on the door akin to the A TO.

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The A TO isn't necessarily knocking on

the door in respect to PAYG and GST.

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However, with the reporting regime,

they can enable the reporting.

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To ensure that the debt is determined

and that the tax office is aware through

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the simple touch payroll system as to

the, the debt that's actually outstanding

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in respect to superannuation and PAYG.

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So when it comes to superannuation,

that falls under what's called the

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Lockdown Director Penalty notice regime.

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So what that means is that.

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The director can be made automatically

liable upon receiving A DPN in respect

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to superannuation from the tax office.

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So you talk about the lockdown penalty

notice, so what else can that cover?

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So a lockdown penalty notice can

also cover GST and PAYG outstanding.

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Unlike normal director penalty

notices, there is no 21 day grace

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period to avoid personal liability.

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The appointment of an external

administrator does not remove

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the director's obligation.

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The only way to resolve a lockdown DPN

is to pay the amount outstanding in full.

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Now, a lockdown, DPN in respect to

PAYG and GST occurs when a company

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has not lodged its BA returns or

IAS returns within three months of

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the due date of when those returns.

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Were to be lodged.

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So by way of an example, if a bass

or an IAS was due on the 21st of the

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month following the first quarter

of the year, IE September quarter

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was due on the 21st of October.

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If that bass or IAS

had not been lodged by.

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The 21st of January, then any debt

owing in respect to that bas or that

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IAS would be capable of the A TO issuing

a lockdown DPN to the director for the

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debt owing pursuant to those IAS or bass.

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Anthony Perl: So I guess the key

question is how do you avoid putting

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yourself in a situation where you've

got these notices coming your way?

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So the easiest way to

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Darren Vardy: avoid A DPN is to

Lodge Lodge IIAS lodge Your base,

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even if you haven't got the cash

flow to pay at the due date.

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That is certainly the easiest way to

avoid any direct of penalty notice in

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respect to saying then when it comes

to the payment, either make the payment

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as soon as practicable or if you are.

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If a company is having cashflow

difficulties, that's when it's

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recommended to look at a formal

repayment plan with the a TO to repay

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that debt over a period of time.

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: 00:14:49

Anthony Perl: The key question as well

is how do they know about these dns?

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Where are they issued?

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How are they received in the first place?

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So director penalty

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Darren Vardy: notices are generally

issued to the director's address.

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The director's address is found on

ASIC records, so if a director has

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moved and relocated, the onus is on

the director to ensure that the ASIC

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records are up to date and accurate.

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If that doesn't happen, what you can

find is that the address for which the

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notice is sent to may not be forwarded on.

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And it may be that, and there has

been circumstances where a director.

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Has been pursued by the a TO as a

result of being issued A DPN, for which

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the director never actually receives

because the director did not update

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their address on ASIC's records.

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: 00:15:46

Anthony Perl: And I guess

email is not a thing, right?

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For these, for at this level, they're,

they're pursuing in direct old fashioned.

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: 00:15:53

Darren Vardy: Correct.

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They are.

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This is true.

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So, you know, when we talk about 21 days

from the date of the notice, quite often

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a director will see that will receive it.

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We've only, you know, anywhere between

15 and 18 days until it's expiry by the

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time they mail actually is received.

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Anthony Perl: So I guess the question is

now for people, you know, are there words

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of wisdom in terms of avoiding this, if

they're becoming a director or if they're

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already a director, what are the things

they need to be on the lookout for?

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So if a person

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Darren Vardy: is a director, the words of

wisdom for directors is to firstly, make

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sure you're aware of the lodgement dates

and when these documents are to be lodged.

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Make sure that you follow up and ensure

that they are lodged by either the company

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or the company's external accountant.

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If you are looking to become a director.

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It's important to note that

becoming a director, you have a

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30 day grace period effectively.

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So within that 30 days, you need to

do due diligence to determine and make

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sure that all lodgements are up to date.

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Because becoming a director,

you can be liable for any

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non lodgements from the past.

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Now, if you were to find out that

there are non lodgements from the past,

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then the only way for you to avoid.

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Any personal liability from those

non lodgements is to appoint

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an external administrator.

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You can't simply resign your position

as a director because when you resign

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as a director, you are still liable

for all the reporting obligations and

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payment obligations that exist during the

period with which you were a director.

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Now if you are unable to affect

the lodgement yourself, and if

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you are to resign, you may as

a bit of an insurance policy.

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You may seek an indemnity from

the company or your fellow

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directors and or shareholders.

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However, that is only as good as.

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The paper it's written on.

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So if the company is unable to

pay, the company's unable to pay.

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If the directors or the shareholders do

not have the financial means to cover

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any indemnity, it means that you as that

resigning director may still be on the

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hook for whatever the claim is by the

tax office under those lockdown VPNs.

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: 00:18:27

Anthony Perl: Just to round things out on

this discussion, I just wanted to ask you

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as well, I meant, we talked earlier about

the fact that, you know, quite often we

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are talking about a business where there

might be just one director, or it might

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be a husband, wife sort of combination.

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But what about when we're talking

about slightly larger companies

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where there are multiple directors?

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: 00:18:45

Is the same level of responsibility still

there, regardless if you're a director of

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one area of the business versus another?

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Darren Vardy: Yes, there is.

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So unlike a large multinational, which

may have non-executive directors, the

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majority of businesses are P-T-Y-L-T-D.

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: 00:19:05

So they're proprietary

private companies, and so.

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If you are a director, you have all the

duties and obligations set out in the

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Corporations Act irrespective of what your

role is within the business operationally.

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: 00:19:22

So it's really important for

individuals to understand the risks

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associated with becoming a director.

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: 00:19:30

Because inadvertently you could be found

that you are liable for debts owing to

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the tax office for which may have been

incurred prior to you becoming a director.

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: 00:19:44

So on that note, if anyone is actually

asked to become a director, it may

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: 00:19:48

well be worthwhile before signing on

as a director to do some due diligence.

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: 00:19:54

Around the taxation, reporting and

payment obligations of the company to

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: 00:20:00

ensure that it is up to date at the

time of providing a consent to act

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: 00:20:05

as a director and being, and being

placed on as a director of a company.

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: 00:20:12

Anthony Perl: And that's all we

have time for in this episode.

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: 00:20:14

Next time on IO Insolvency Options,

we'll continue exploring director penalty

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: 00:20:19

notices with real world case studies

that reveal the devastating consequences

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: 00:20:24

of outdated asset records and the

critical role of registered agents.

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: 00:20:28

Darren will share shocking examples of

directors who nearly lost everything

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due to simple administrative oversights.

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: 00:20:36

It's essential listening for every

company director for details on

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: 00:20:40

how to get in touch with Darren and

his team on insolvency challenges.

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: 00:20:44

Please consult the show notes.

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: 00:20:46

This podcast is produced by my

team at podcast done for you.com

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: 00:20:50

au helping professionals

share their expertise through

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: 00:20:53

powerful podcast content.

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: 00:20:55

If you found value in today's

episode, please like, comment and

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: 00:20:58

subscribe to IO insolvency options.

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: 00:21:01

Until next time, remember, there's always

a way forward when you know your options.