HG Alert: Director Penalty Notices: How the taxman can get his hands on your family home - 27 Oct 2010

Many small and medium business owners carry out business through a company in the belief that their personal assets will be protected from creditors, including the Tax Commissioner.

Although a company structure may protect personal assets in some cases, the ATO has the power to seize the family assets of directors in some circumstances. These powers can even be used against people who were not directors when the tax debt was incurred.

In the current economic environment, the ATO is inclined to act quickly where there are signs a business is having difficulty paying tax debts. To collect outstanding PAYG withholding amounts, the ATO often relies on director penalty notices (DPNs), which can allow the ATO to sue directors personally.

Where a director is sued personally, any personal assets (including the family home) may be at risk.

What is a DPN?

A DPN is the legal notice that the ATO needs to issue before it can commence recovery action against a director personally for outstanding PAYG withholding amounts.

DPNs are a preferred tool of the ATO because directors are forced to bear personal liability for the company tax obligation in full, or to appoint a voluntary administrator or liquidator to the company. The ATO may commence recovery action 21 days after a DPN is issued.

The ATO issued around 6,400 DPNs in the year ended 30 June 2010. Most commentators expect a substantial increase on this already record number, given the uncertain economic climate and climbing interest rates.

Currently, DPNs may only be issued for outstanding PAYG withholding amounts. However, the Labor party went to the previous election promising to extend DPNs to also cover other tax liabilities such as superannuation guarantees and GST.

The DPN process

If a director is served with a DPN (usually by post), time is absolutely of the essence. The 21 day period to comply with the DPN starts on the date the DPN is posted, not the date it is received - even if there are postal delays.

In our experience, directors often fail to avoid personal liability because they are one or two days late in appointing an administrator to the company, or because they simply put their tax problems in the 'too hard basket'.

It comes as a great shock to many company directors, who may have thought a company structure provided commercial protection, to realise that personal assets that have nothing to do with the business are now at risk.

Prevention is better than cure - what should you do?

A DPN can be catastrophic for a small business owner and their family. Business owners must review their business arrangements from an asset protection perspective, and restructure their affairs to put themselves in the best possible position to protect their family wealth from any threats.

It is also important that any avenues for negotiating suitable outcomes with the ATO are explored before a DPN is issued in the first place.

If a DPN is issued, you must act quickly. You only have 21 days from the date the DPN was posted to act and avoid the ATO taking recovery action against you personally. This is the case regardless of whether you ever actually receive the notice, so it is important that ASIC records are kept up to date.

For more information, please contact HopgoodGanim's Taxation and Revenue team. We have substantial experience dealing with the Tax Commissioner, and helping clients to restructure their business and personal affairs to protect their assets.