What is a Director Penalty Notice?

Sam Merrylees

Senior AssociateAitken PartnersView Profile

Are you a company director or small-to-medium business owner concerned about the possibility of receiving a Director Penalty Notice (DPN) from the Australian Taxation Office (ATO)? Or have you already received one?

A DPN can have potentially serious consequences and can expose you personally to a penalty equal to the company's unpaid tax and superannuation liabilities.

Once a DPN is received, your time to act is limited, so obtaining timely legal advice is crucial. A lawyer with experience in handling DPNs can assess your personal exposure as a director, explain your options, identify any applicable defences and help determine the appropriate course of action within the relevant timeframe.

So exactly what is a director penalty notice and who can receive one?

In this post we cover this, as well as look at the two types of Director Penalty Notices that are issued, what debts they may cover, and what action you can take after receiving one.

What is a Director Penalty Notice?

In Australia, company directors are obligated to ensure their company meets certain superannuation and tax liabilities. If those liabilities are not met by the company, directors may become personally liable for a penalty equal to the unpaid company liability.

The types of company debts covered under a DPN include unpaid:

• Goods and Services Tax (GST);

• Pay As You Go (PAYG) withholding amounts; and

• Superannuation Guarantee Charges (SGC).

A DPN is the mechanism by which you will be notified of any personal liability. Once issued, the ATO allows you 21 days to take appropriate action. After this time period, the ATO may commence recovery proceedings against you.

What Happens If You Ignore a Director Penalty Notice?

If a director fails to take action within the required timeframe, a DPN can lead to a range of serious personal consequences, including the director becoming personally liable for a company’s tax and superannuation liabilities, and the ATO either:

• commencing debt recovery proceeding against the director personally;

• offsetting any tax refunds or creditors against the DPN; and/or

• issuing garnishee notices to the director’s banks and employers.

Note, the ATO may issue multiple DPNs to one individual, covering penalties relating to more than one company and/or more than one type of liability.

Why a Director Penalty Notice Matters to Company Directors?

If you have taken on the role of company director, you should be aware of the legal responsibilities that come with the position. These include obligations relating to certain company tax and superannuation liabilities. In order to hold directors personally accountable for these obligations, the ATO has set up a director penalty regime, under the Taxation Administration Act 1953 (Cth), which is designed to encourage directors to ensure their companies meet their obligations or, where this isn’t possible, take appropriate steps to place the company into external administration (either voluntary administration or liquidation) or initiate a small business restructuring (SBR).

Therefore, understanding your responsibilities as a director, the company’s financial and tax position, and the potential personal exposure that comes with the role, is important before accepting a directorship.

Are Only Current Directors Subject to DPN Liability?

Whether you are a current, new or former director, you may still face DPN liability in certain circumstances.

Current directors may become personally liable for certain unpaid company liabilities where they were a director when the relevant obligation fell due.

New directors can potentially become liable for certain pre-existing liabilities if they do not take the required action within 30 days of appointment.

Former directors may continue to have liability even after resigning for tax debts due before their resignation, or after their resignation where the liability relates to a period when they were still a director.

Types of Director Penalty Notices

There are two types of DPNs: non-lockdown and lockdown DPNs. Depending on which type of DPN you receive, different options may be available to you.

Non-Lockdown DPNs

In general, non-lockdown DPNs (also known as remittable DPNs) apply where the company’s liability has been reported within the applicable statutory timeframe and remains unpaid. The relevant tax lodgements include:

• Business activity statements (BAS);

• Instalment activity statements (IAS); and

• Superannuation guarantee charge (SGC) statements.

Depending on the circumstances, the penalty may be remitted and your personal liability cancelled if you take satisfactory action within 21 days of the DPN being issued. Such action may include:

• ensuring the company pays the relevant liability;

• appointing a voluntary administrator;

• appointing a small business restructuring practitioner; or

• placing the company into liquidation.

A lawyer can assist you in determining the right course of action.

Lockdown DPNs

A lockdown DPN will be issued by the ATO in circumstances where a company has failed to lodge its BAS, IAS and/or SGC statements within the required timeframe, and results in a director becoming personally liable for the company’s relevant tax debt. This is regardless of whether or not you appoint an administrator, restructuring practitioner or liquidator within the 21-day period. You must pay the underlying liability in order to discharge the penalty.

This distinction serves as a reminder that allowing company tax reporting to lapse can leave you in a very difficult position, and by the time a DPN arrives, your options are far more limited.

How Long Does a Director Have to Act?

The 21-day period: Generally, the ATO will not commence recovery proceedings against a director until 21 days after the DPN is given. For a non-lockdown DPN, this period can provide an opportunity to take action that may result in the penalty being remitted. For a lockdown DPN, insolvency or restructuring options generally will not remit the penalty.

What If I Wasn't Aware of the DPN Being Issued?

A DPN is legally considered to have been given at issuance date, regardless of when a director becomes aware of it. So, if you don’t become aware of it until later, the 21-day period doesn’t restart.

If you do find out about a DPN late, speak with a lawyer as soon as possible. They can investigate whether the notice was validly given and whether or not any other options or defences are available to you.

What Should Directors Do After Receiving a DPN?

If you have received a DPN, do the following as soon as possible:

1. Don’t ignore the notice. Act promptly.
2. Check the type of DPN (lockdown or non-lockdown). This distinction significantly affects the options available to you.
3. Check the amount and liabilities identified in the DPN, and company records. Make sure you understand what the ATO says is owed and which liabilities the notice relates to.
4. Engage a lawyer, not just an accountant. A DPN can expose you to personal liability for the company's tax debt, so it’s important to understand your legal position before deciding how to respond. A commercial litigation, tax disputes or insolvency lawyer with experience in DPNs can review the notice, explain your options and advise on any applicable deadlines.
5. Don’t resign in an effort to remove yourself from personal liability. First, you need to understand whether liability has already been attached. Also, if you are liable, resigning won’t necessarily eradicate your liability.

What If You Cant Personally Pay the Debt?

If you are a director and you don’t have enough personal funds to pay the amount identified in a DPN, there may be other options involving the company, including restructuring, voluntary administration or liquidation, or negotiating a payment plan with the ATO. These options may have significant consequences for the company, its creditors and/or the director, so must be considered with appropriate legal and insolvency advice.

Can You Avoid a DPN?

Can a DPN be avoided or cancelled?

To avoid a DPN in the first place, you should take measures to ensure the company:

• lodges IAS, BAS, and relevant SGC statements on time;

• pays PAYG withholding, GST and superannuation liabilities by their due dates;

• maintains accurate financial and tax records;

• monitors tax and superannuation debts rather than allowing them to accumulate; and

• obtains professional advice promptly if the company can’t meet its obligations.

In terms of having a DPN cancelled, you will need to take appropriate action within the notice period if you want a non-lockdown DPN to be cancelled, and personal liability remitted.

When Should A Director Seek Legal Advice?

Consider legal advice at the following junctures:

Before becoming a director

Those considering taking on directorship should consider the question, ‘Am I personally liable for my company's unpaid tax debts?’ You may be, which is why it’s important you understand the company's financial and tax position before your appointment, so that you can make an informed decision about your personal exposure. A lawyer can assist with due diligence, including reviewing information about outstanding tax and superannuation liabilities, creditor debts, financial difficulties and other potential risks.

Before a DPN is issued

You don’t need to wait to receive a DPN before seeking legal advice. If the company you direct is struggling to pay tax or superannuation liabilities, a lawyer can help assess the company's position and the options available to you to reduce your personal exposure. You may need to consider:

• whether the company can continue trading;

• whether restructuring is appropriate; and/or

• the appropriateness of voluntary administration, small business restructuring or liquidation.

Early legal advice is particularly important in situations where relevant liabilities have not been reported within the applicable timeframes, as this may affect whether you are personally exposed to a lockdown DPN.

After receiving a DPN?

If a DPN has been issued, prompt legal advice is particularly important. A law firm with experts in tax disputes, insolvency and restructuring, or director liability can:

• review the DPN and the underlying liabilities to check whether the amount claimed appears correct;

• determine whether the DPN is a lockdown or non-lockdown DPN;

• assess whether the director may have a statutory defence or other grounds to challenge the liability;

• advise on the options available within the 21-day period for a non-lockdown DPN (this may include paying the company's liability or taking prescribed insolvency or restructuring steps within the relevant timeframe);

• explain the implications of administration, restructuring or liquidation; and

• advise former or newly appointed directors about how the timing of their appointment or resignation may affect their liability

• establish whether the lockdown provisions have been correctly applied, in lockdown DPNs.

A statutory defence may also be available in some circumstances, including where illness or another good reason prevented the director from taking part in the company's management, or where the director took all reasonable steps in the circumstances. Whether a defence applies will depend on the factual circumstances and the available evidence.

Legal Support with a Director Penalty Notice

If you have received a DPN, think one may be imminent, are concerned about your company’s tax exposure, or have recently become a director of a company with outstanding tax or superannuation liabilities, seek legal advice as soon as possible.

Aitken Partners can advise directors on DPNs, potential personal liability, available statutory defences and the options available to the company and its directors. Early legal advice can help you understand your position and act while meaningful options remain available.

Contact us.

FAQ 1: Does resigning as a director remove my DPN liability? 

Not automatically. If the debt arose before you resigned, the liability already attaches to you. Resigning after a DPN is issued does not remove the penalty. Resigning before a DPN is issued may help in some circumstances, but this depends on when the relevant obligation arose and whether lodgements were current. Get legal advice before resigning.

FAQ 2: Can the ATO issue a DPN without warning?

Yes. The DPN itself is the formal notice. The ATO is not required to send informal warnings before issuing one. Directors sometimes receive a DPN as the first formal communication about unpaid liabilities, particularly if correspondence was sent to an outdated address.

FAQ 3: What if my company cannot pay the debt and I cannot personally pay it either?

There may be options involving the company, including voluntary administration, restructuring, or liquidation, but each carries consequences for the company, its creditors, and for you personally. Whether those steps actually reduce your personal exposure depends on the type of DPN you have received. For a lockdown DPN, these steps do not discharge the penalty. Legal and insolvency advice is necessary before deciding.

FAQ 4: Can I dispute the amount in a Director Penalty Notice?

Yes. Directors have the right to challenge a DPN if the amount is incorrect, the notice was not validly issued, or a statutory defence applies. Common grounds include that the director was unable to participate in management due to illness, or that all reasonable steps were taken in the circumstances. Whether a defence succeeds depends on the specific facts. 

FAQ 5: How long does a Director Penalty Notice stay active?

There is no statute of limitations that applies once a DPN has been issued. The ATO retains the ability to pursue recovery against a director even years after the notice is issued if the penalty has not been discharged. This makes early action particularly important.