DPN guestimate sheeted home to a related party director

A Directors Penalty Notice (DPN) issued on a c$19m tax liability ‘guestimate’ by the ATO has landed a related party director in hot water.

Although the amount was later reduced to c$4m (once the ATO issued an amended Estimate Notice), the Court found ([2019] FCA 1086) that the timing to comply with the DPN was still from when it was first issued.

Side bar: DPN’s can be issued by the ATO to a director (making that director personally liable), where the company has:

  • failed to pay PAYG or superannuation; or
  • lodge business activity statements for 3 consecutive months.

Back to the case and the guestimate. Here we have 2 co’s: (1) Employee Holding co; and (2) Trading co.

Employee co contracts its workers to Trading co, and lodges the relevant BAS (PAYG). However, after a number of years it enters Administration owing just short of $1m.

ATO, understandably, is not happy and so it investigates Trading co. ATO estimated that on average businesses in that particular industry have employee costs of c22% of revenue, and so they issued an Estimate Notice on Trading co for c$19m (now c$4m).

The Court found that because the Trading co directly paid employees (via batch payments), the PAYG liability sheeted home to it.

Accordingly, when the Estimate Notice was given, the Trading co had 21 days to pay – despite the guestimate/dispute.

Remember this is a lock-down DPN, meaning appointing External Administrators won’t prevent personal liability to the director.

Moral of the story:

  1. make sure that the Employee co pays employees directly
  2. ensure the strictest compliance with all BAS lodgments
  3. if you receive a DPN speak to an expert insolvency practitioner

tax insolvency svvoidables

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