Failure to lodge penalty amnesty might not spare business leaders from ATO’s ‘lockdown’ director penalty notices

Small business directors who confess their late tax statements under the failure to lodge penalty amnesty program may not be spared from other Australian Taxation Office crackdowns, including the use of ‘lockdown’ director penalty notices, a leading restructuring expert has warned.

Announced in the 2023-2024 federal budget, the new Australian Taxation Office (ATO) amnesty allows small businesses to come forward with tax forms originally due between 1 December 2019 and 28 February 2022 without drawing costly failure to lodge (FTL) penalties.

More than 7,200 small businesses have now confessed income tax returns, business activity statements (BAS), and fringe benefits tax returns which were originally due in the relevant time period, the ATO says.

While struggling small businesses are enjoying that leniency, the amnesty does not cover every potential penalty applied to overdue obligations.

This means small business directors who confess their late payments under the amnesty scheme could still find themselves subject to director penalty notices (DPNs) that hold them personally liable for the unpaid debts, says Jarvis Archer, head of business restructuring and insolvency at Revive Financial.

‘Lockdown’ DPN risk for overdue payments

DPNs come in two varieties, each serving as a powerful tool the ATO can use to recoup overdue tax obligations.

The first kind covers directors who confess their company tax debts within three months of their original due date, but the debt remains unpaid.

Under that scenario, directors have 21 days to remit the DPN by paying the company debt back in full, appointing an administrator or restructuring practitioner, or agreeing to have the company wound up.

Failing to comply within 21 days can result in the ATO holding the company director personally liable for the outstanding debts — and the use of garnishee notices, the offsetting of tax credits against company debts, and court-sanctioned recovery proceedings.

The second kind of DPN covers payments reported three months after their due date.

The only way for company directors to remit this kind of ‘lockdown’ DPN is to pay the outstanding debt in full.

The way the FTL amnesty is structured means directors may find themselves subject to these ‘lockdown’ DPNs, the most pressing kind of DPN, Archer said.

“The amnesty covers lodgements for periods to 28 February 2022,” Archer told SmartCompany.

“This means all BAS lodged will be more than three months past their due dates and therefore eligible for a lockdown DPN, which makes the director automatically liable for their company’s BAS debt.”

Profound consequences for company directors

Such an outcome can have extremely serious consequences not just for the director but for the business itself, Archer said.

“Owing the debt personally means the director is then facing personal insolvency, such as bankruptcy, which prevents them from being a company director.

“So while their business trading may have sufficiently recovered from the pandemic, the inability to reduce company debts, or facing personal bankruptcy, means their business may also face closure.”

Crucially, because the only way to remit a ‘lockdown’ DPN is the full repayment of the debt, the ATO can still chase directors for debts even when the company has been placed in liquidation.

“In the last week I’ve seen two lockdown DPNs issued which covered periods from as far as back as 2018,” Archer said.

“One of those was a company that had already been liquidated and deregistered.”

DPN issuance remains strong

The ATO did not directly respond to SmartCompany questioning about its issuance of DPNs in relation to overdue forms lodged under the FTL amnesty.

However, the tax office is clear that DPNs are now a major component of its strategy to recoup an estimated $30 billion in outstanding small business tax debt.

The ATO issued more than 23,000 DPNs to individual company directors in the 2022-2023 financial year, covering more than 17,000 companies, an ATO spokesperson said Friday.

“Since 1 July 2023 approximately 1,500 DPNs have issued to individual company directors with respect to over 1,100 companies,” they added.

“Currently, we are issuing an average of 60 DPNs per day.”

By way of comparison, the ATO said it issued 40 DPNs a day in May last year.

With DPN usage clearly a cornerstone of the ATO’s strategy, some small business advisors are calling for discretion in their usage.

While recognising the importance of small business engagement with the taxation system, Archer questioned if issuing 21-day, non-‘lockdown’ DPNs in relation to forms lodged under the FTL amnesty would be more appropriate than immediately leveling ‘lockdown’ notices.

“This would mean that company directors reengaging with the tax system would be required to make a decision about their company’s future, without facing potential personal insolvency and bankruptcy,” he said.