What is a Director Penalty Notice?

This article explains a director’s personal liability when served with a Director Penalty Notice (DPN) issued by the Australian Taxation Office (ATO) and distinguishing between lockdown and non-lockdown notices.

It outlines key defences and emphasises the need for prompt action to manage exposure and avoid enforcement. 

What is a Director Penalty Notice? 

A DPN is a notice issued by the ATO that can make a director personally liable for certain unpaid tax liabilities.  

The timing of a DPN

A director’s personal liability for unpaid company taxes (PAYG withholding, GST and superannuation guarantee charge) arises automatically as soon as the company misses its payment due date.  

While the ATO does not issue a DPN immediately, the timing of its issue depends on whether the company has lodged the required returns or statements on time. 

Types of DPNs: Why does it matter? 

If a company has reported the debt on time by lodging its BAS/IAS (for PAYG and GST), but has failed to pay that liability, the ATO may issue a non-lockdown DPN.  

However, if the company fails to lodge within the prescribed timeframes, the ATO is likely to issue a lockdown DPN. 

When a DPN is issued, the company still owes the debt; however, now the director also owes the debt at the same time. This is known as joint and several liability.

The ATO can recover the debt from either the company, the director, or both, in any combination, until the total is paid.  

If there is more than one director of the company, each is personally liable for the full amount (not just a proportional share). The ATO can pursue any one director for the entire debt, and it is up to the directors to resolve the contributions between themselves afterwards.  

What is the difference? 

Read the DPN carefully and check your records with your accountant as to whether company lodgements have been made on time. If your lodgements were made on time, it may be more likely to be a non-lockdown DPN. The wording of the notice may also help you determine what type of DPN it is: 

• A non-lockdown DPN will typically include wording to the effect that personal liability can be avoided if, within 21 days, the director ensures the debt is paid or the company is placed into administration, liquidation, or enters a restructuring process. 
• A lockdown DPN typically states that placing the company into administration or liquidation will not relieve the director of personal liability and that the debt must be paid in full to avoid enforcement. 

Responding to a DPN 

Seek advice from your insolvency lawyer or accountant as soon as you receive the notice. They can confirm the type of DPN, check company lodgement and advise on your options. 

If you have a non-lockdown DPN, you have 21 days from the date of the notice to resolve your personal liability. This can be done by: 

• paying the debt in full (from company or personal funds); 
• appointing a voluntary administrator to the company; 
• appointing a small business restructuring practitioner; or 
• appointing a liquidator and commencing the winding up of the company. 

If you have a lockdown DPN, your only option to remove personal liability is to pay the debt. Putting the company into administration or liquidation may resolve the debt owed by the company; however, you (and any other directors) will still be liable for it.  

A DPN does not expire. If you receive one and do nothing, whether it is a non-lockdown or lockdown DPN, the ATO can act against you at any time in the future. 

What action does the ATO take to recover the debt?

The ATO has several options to recover a debt owed:

• Garnishee notice – It can collect the debt directly from third parties who owe you money, such as your bank or an employer.
• Legal proceedings – It can take court action to recover the debt, which could lead to bankruptcy proceedings against you.
• Offsetting tax credits – Any tax credit due to you, such as an income tax refund, can be applied against the director penalty.

It is important to note that the clock starts ticking from the date on the notice, not when you receive it, so it’s crucial to act immediately.

Prevention is always better than cure, and lodging tax obligations on time helps you avoid a lockdown DPN in the first place.

Can Small Business Restructuring protect me from a DPN?

Yes, If the ATO has issued a 21-day non-lockdown DPN, one way to avoid personal liability is to place the company into Small Business Restructuring within the 21 days.

Does Safe Harbour protect me from a DPN?

No, Safe Harbour does not protect you from a DPN. Safe Harbour may give a director some protection from personal liability for insolvent trading while they pursue a genuine restructuring.

Challenging a DPN 

Defences may be available from the moment the DPN penalty exists. Most directors raise defences after the ATO starts recovery proceedings because that is when defences are legally determined; however, you do not need to wait. You can raise a defence immediately after receiving a DPN. This can sometimes avoid litigation altogether and the associated legal expense.   

Unfortunately, there are only a handful of defences available to a DPN debt and the burden is on the director to prove the defence to the requisite Court standard (even when communicating with the ATO). Defences that may be available to you can include: 

• illness or other acceptable reason for not participating in management; 
• taking all reasonable steps to ensure compliance (or there were no such steps you could take); or 
• in relation to Superannuation Guarantee Charge, that the company took reasonable care to apply the legislation in a way that was “reasonably arguable”.  

How can FC Lawyers help?

DPNs are on the rise and the ATO is definitely taking a stronger view. You need to act quickly if served. At FC Lawyers, our business and corporate team has extensive experience with assisting directors in these matters. 

Contact our team to discuss how we can assist you through any Director Penalty Notice issues you may have.