Business insolvencies are back to pre-pandemic levels with the ATO firing out 120 director penalty notices a day as it ramps up debt collection to full speed.

What is a Director Penalty Notice?

A Director Penalty Notice is a notice the ATO sends to a company director in one of many circumstances, meaning the director is personally liable for the company’s debts.

Among other liabilities, a company with employees has PAYG and Superannuation Guarantee Contribution Obligations (SGC). Where a company fails to met these requirements, the ATO will seek to collect these amounts from the company. It may also serve the director with a penalty notice.

Types of Notices

There are 2 types of notices:

Traditional Notice: The director receives a warning in which they have 21 days to pay all outstanding PAYG and/or SGC. If payment is not made within this timeframe, the director then becomes personally liable

Lockdown Penalty Notice: Directors must pay their debts in full unless they have a valid defence. They cannot avoid liability by placing the company into voluntary administration or liquidation

Options for Directors

If a director is served with a Director Penalty Notice, there are only limited options to discharge the penalty. For companies that have not reported the unpaid debts within three months of the due date, the only option to discharge the penalty is to pay the debt.

However, if the company has reported the unpaid amounts within three months of the due date, there are more options. These include:

• Paying the debt in full
• Having a liquidator appointed to wind up the company
• Appointing an administrator to the company
• Appointing a small business restructuring practitioner
• Proving a defence to the director penalty notice

Your company must undertake these actions within 21 days of the issue of the notice. If they are not, the director is liable until the debt is paid in full.

July 2022 recorded 674 businesses being wound up or entering administration, which brings these figures in line with 2019-20. Clearly, small business is taking up a large share of tax debt, and Director Penalty Notices are proof of the ATO’s focus on this.