Why directors must buy a ‘runway’ when faced with DPNs

Speaking with Accounting Times, Boyle Litigation Lawyers managing partner and director Lachlan Boyle has noted the significant spike in director penalty notices (DPNs), and that directors have unwarranted fears about lodging after receiving a notice.

With 21 days given for a director to take action to a DPN or to respond, Boyle said it is crucial for directors to buy a “runway”.

A runway is when directors act promptly and reach out to advisors to determine an appropriate strategy, Boyle said.

“Buying a runway is engaging with the appropriate advisors to allow us to utilise that 21-day time frame to appropriately devise a plan and devise a strategy, which is ultimately going to mitigate the personal exposure for the director but also ensure that the company maintains its taxation compliance.”

“A lot of the time, these DPNs are the first catalyst for a client coming to you and realising that they are insolvent or facing insolvency,” Boyle said.

Boyle told the brand that in his career, he hasn’t seen the ATO take this much recovery action before.

“This is probably the most active I’ve ever seen the ATO in terms of the recovery regime on all fronts, not so much just director notices, but also statutory demands in winding-up applications. They’re taking a very systematised approach to recovery action,” he said.

“That’s obviously in light of the significant blister of taxation liability that is out there, but it is a pretty considerable approach that they’re taking in terms of recovery action.”

For directors, he noted that there is a substantial amount of fear when it comes to bringing their lodgments up to date following receiving a DPN.

“I find that directors are fearful of the unknown – they put it out of sight, out of mind.”

“They fear that by the time they go to the accountant, their accountant will then tell them to lodge or bring their lodgments up-to-date, and they’ll start to have to pay back to the ATO.”

“So they just let it go, thinking that, effectively, that lodgment will crystallise the liability; but that is simply not the case.”

Despite these fears, Boyle stressed that it is the opposite that is often the case.

“The most expensive mistake a director can make is not lodging on time, even if they don’t have the ability to pay,” he said.

The importance of the client-accountant relationship

“The accountant is usually the first person a director rings, because there is that element of trust and confidence. There’s probably a long-standing relationship, a commercial relationship that’s been in place for some time,” Boyle said.

“That first conversation often decides the outcome of what happens after a DPN is issued. A director, if they get prompt advice and they’re told exactly what a DPN is, they trust that accountant, and they will act on what they hear.”

Boyle said that it is crucial to advise the client sooner rather than later.

“Advise the client directly to say, ‘this is serious, we need to take prompt action,’ because the directors that ultimately receive a DPN are usually the ones that are slightly lax in terms of compliance, and also aren’t ordinarily prompt to take action, particularly when it comes to these taxation liabilities.”