I received a Director Penalty Notice: what do I do?

Estimated reading time: 10 minutes Business survival, Asset protection

Receiving a Director Penalty Notice (DPN) will be a confronting experience for any company director.

What is a Director Penalty Notice?

In article:

What is a Director Penalty Notice?

  • A Director Penalty Notice (DPN) is a tax enforcement instrument issued by the Australian Taxation Office for unpaid tax debt.
  • It is issued to directors of companies and, if it is not complied with, they become personally liable for the company’s unpaid tax debts.
  • A ‘lockdown’ DPN is an instrument that can only be discharged if the director actually pays the tax debt.
  • A ‘non-lockdown’ DPN can be discharged by putting the company into liquidation, voluntary administration or by appointing a small business restructuring practitioner.

Receiving a Director Penalty Notice (DPN) will be a confronting experience for any company director. The director’s personal assets are at risk, and if it is a ‘lockdown’ DPN, then the problem won’t be solved through a voluntary administration, restructuring practitioner or liquidation procedure. A lockdown DPN makes it essential for the company director to pay the tax debt themselves if their company can’t do so.

Where the DPN is in respect of amounts which were reported to the ATO within 3 months of their reporting due date, and has not been paid, the director can:

  • Pay the debt which is the subject of the Director Penalty Notice; or
  • Place the company into liquidation, voluntary administration, or appoint a small business restructuring practitioner.

This is known as a ‘non-lockdown’ DPN. 

If the DPN relates to amounts both unpaid and unreported 3 months after the end of the reporting period, appointing a liquidator, voluntary administrator or small business restructuring practitioner will no longer have the effect of extinguishing the director’s personal liability. This is known as a ‘lockdown’ DPN.

What Are the Defences to a Director Penalty Notice Claim by the ATO?

What options are available to you when you don’t believe that you should be responsible for the debt of the company? There are a number of defences available if the ATO commences proceedings against you. The defences include:

1. Illness

In cases where a director can show that, either through illness or some other good reason, they were not involved with the management of the company and that it was reasonable that they not be involved, the director may be able to escape personal liability.

2. Reasonable Steps

Directors can defend themselves against personal liability where they can show that they took all reasonable steps (unless no reasonable steps were available) to ensure that:

  • The company complied with its obligations to pay;
  • A voluntary administrator was appointed;
  • A small business restructuring practitioner was appointed; or
  • Directors initiated the winding up of the company.  

Unless an insolvency practitioner is appointed (as voluntary administrator, liquidator or small business restructuring practitioner), this defence is a longshot, as it is a rare situation where a director will be able to argue that they took reasonable steps to ensure payment when they in fact did not cause the tax debt to be paid. 

What changed with the 2012 reforms?

The 2012 changes divided DPNs into two categories:

  1. Obligations that were unpaid and unreported for more than three months beyond the due date for reporting; and
  2. Obligations that were unpaid by the due date but were reported in BAS and SGC Statements within the three month period of the due date for reporting.

In the first category, unpaid and unreported obligations become a penalty imposed personally upon a director when the DPN is issued. However, under this category, a director is not able to  escape personal liability by placing the company into voluntary administration or liquidation (in 2022, this was extended to include the appointment of small business restructuring practitioners as well, see below). The only way to remove the penalty is for the director or company to make payments of the debt in full (or ultimately go into personal bankruptcy).

In the second category, a director is able to discharge personal liability for unpaid but otherwise correctly reported obligations by placing the company into voluntary administration or liquidation or paying the outstanding debt (as of 2022, this also includes the appointment of a small business restructuring practitioner). 

These 2012 reforms also extended the DPN regime which previously only applied to PAYG withholding to include the Superannuation Guarantee Charge (SGC). 

By notifying the ATO of outstanding amounts of PAYG, SGC and GST (a further addition to the DPN framework — for more information see discussion below) when lodging the BAS or IAS, the director will avoid the first category of DPN, i.e. a ‘lockdown’ Director Penalty Notice.

2019 reforms: criminal sanctions

On 1 April 2019, new provisions were introduced to the Director Penalty Notice Regime which allowed criminal sanctions to be sought for unremitted superannuation obligations. Under these provisions, the Commissioner may write to a director ordering payment of a Superannuation Guarantee Charge under the Superannuation Guarantee (Administration) Act 1992. This charge is composed of the shortfall amount plus interest on this amount (10%) and a quarterly administration fee calculated per employee ($20).

This direction does not create a separate liability to pay the outstanding sum, but an offence may be deemed to have been committed if the amount has not been paid.

Where the Commissioner has issued a direction and the liability is not discharged within the specified time, the director listed on the notice will have committed an offence of strict liability, occasioning a penalty of 50 penalty units, which is equivalent to $10,500, 12 months imprisonment or both.

2020 Reforms: Personal Liability for GST Debt and Restructuring Practitioners

As a result of the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020, DPNs can now be issued in relation to unpaid Goods and Services Tax (GST), wine equalisation tax (WET) and luxury car tax (LCT). This broadens the scope of personal liability for directors beyond superannuation contributions and PAYG, placing a positive obligation on directors to ensure their company pays its GST liabilities. 

The Corporations Amendment (Corporate Insolvency Reforms) Act 2020 introduced the small business restructuring framework. In short, if a small business is insolvent (debts of less than $1 million), it can appoint an independent insolvency practitioner, the ‘restructuring practitioner’, who can guide the business through a debt restructuring plan. If the plan is accepted by creditors, the business can continue to trade as a going concern. 

A consequential amendment to the Taxation Administration Act 1953 adjusted the DPN framework to account for the appointment of these practitioners.  A director can fulfil the requirements of a ‘non-lockdown’ penalty notice by appointing a restructuring practitioner. 

It is also a defence for a director having been issued a DPN that they took reasonable steps to cause the appointment of a restructuring practitioner. 

Read more about the new small business restructuring framework at A Complete Guide to the Small Business Restructuring Process.

Also in 2020, the ATO became more relaxed in its issuing of DPNs as a response to the Covid-19 pandemic. None, or very few, DPNs were issued whilst the Covid-19 pandemic disrupted our economy.

2022 ATO Practice Change: No More Payment Arrangements

Prior to March 2022, when a business was issued with a non-lockdown DPN, in addition to the options of voluntary administration or liquidation, directors could respond to a DPN by agreeing to a payment arrangement with ATO. 

As of March 2022 onwards, the ATO has dropped this option from its DPNs. Presumably as a result of the new small business restructuring regime, ATO deems this option to no longer be necessary. 

It is also likely that the ATO has altered its practice in line with the decision of the Full Bench of the Federal Court in Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5. This decision held that a payment arrangement with the ATO won’t necessarily mean that a debt is no longer ‘due and payable’. In effect, as a consequence of a tax debt, a business could still be insolvent (and therefore generally obligated to enter into external administration), despite making payments as agreed with the ATO.  Therefore, allowing payment arrangements could be seen as inconsistent with the director’s obligation to prevent insolvent trading, and instead initiate an external administration procedure under the Corporations Act 2001.

This practice change may lead to an increase in external administrations, as directors seek to avoid the personal liability of a DPN. 

The mechanics of Director Penalty Notices

To recover a penalty from a director, the ATO will issue a DPN and must wait until the 22nd day after issuing that notice before commencing Court proceedings. Note that the timeframe for compliance with a DPN commences on the date on which it is posted not the date it was actually received.

A DPN will be sent to the director at their residential address listed with ASIC and will describe the options that are available to a director in order to achieve remission of the director penalties.

If the DPN penalty is not discharged before the 22nd day after the Director Penalty Notice is given to the director, the penalty is not remitted and the director is liable for the penalty amount until it is paid in full. To enforce this claim, the ATO may then commence court proceedings against the director personally. The only way for the director to then avoid this debt will be for them to go personally bankrupt. 

The ATO is empowered by the legislation to compel payment from a third party that holds amounts due to, or on behalf of, a taxpayer that is indebted to the ATO. Once a Director Penalty Notice has been issued, and the 21 day period had expired, the ATO is entitled to seek a garnishee order against any third party that owes money to, or holds money on behalf of, the relevant director, including a director’s personal bank accounts.

Limited remission or ‘lockdown’ rule

The first category of Director Penalty Notice set out above gives rise to a ‘lockdown’ DPN.

Where the company has not reported the unpaid amounts within three months of the due date, the only option to have the associated penalty remitted is a payment of the debt. The penalty cannot be remitted by placing the company into voluntary administration, liquidation or small business restructuring. Ultimately if the director cannot negotiate a satisfactory outcome with the ATO and they can’t pay the debt personally they may need to consider personal bankruptcy.

Liability of former Directors

Directors remain liable under the DPN for penalties equal to unpaid PAYG withholding, SGC liabilities and GST liabilities of the company which were due up to the date of their resignation.

Relevant legislation

Superannuation Guarantee (Administration) Act 1992 (Cth)

To a limited extent, this Act can provide a defence to a director’s liability for superannuation guarantee charge if the company took reasonable steps to comply with its obligations by adopting a reasonable interpretation of the Act, and consistently applying the interpretation.

Taxation Administration Act 1953 (Cth) Schedule 1 Division 269

Division 269- Penalties for directors of non-complying companies

269-1 What this Division is about

The directors of a company have a duty to ensure that the company either:
(a) meets its obligations under Subdivision 16-B (obligation to pay withheld amounts to the Commissioner) and Division 268 in this Schedule and Part 3 of the Superannuation Guarantee (Administration) Act 1992 (obligation to pay superannuation guarantee charge); or
(b) goes promptly into voluntary administration or restructuring under the Corporations Act 2001 or into liquidation.
The directors’ duties are enforced by penalties.
Note: The duties this Division imposes on the directors of the company are in addition to the similar duties imposed on the public officer of the company. See subsection 252(1) of the Income Tax Assessment Act 1936 .

269-5 Object of Division

The object of this Division is to ensure that a company either:
(a) meets its obligations under:
(i) Subdivision 16-B (obligation to pay withheld amounts to the Commissioner); and
(ii) Division 268 (estimates of PAYG withholding liabilities and superannuation guarantee charge); and
(iii) Part 3 of the Superannuation Guarantee (Administration) Act 1992 (obligation to pay superannuation guarantee charge); and

(iv) Divisions 33 and 35 of the * GST Act in respect of * assessed net amounts; and

(v) Division 162 of the GST Act in respect of GST instalments (within the meaning of the GST Act)

(b) goes promptly into voluntary administration or restructuring under the Corporations Act 2001, or into liquidation.
Note: The directors’ duties are enforced by penalties on the directors. A penalty recovered under this Division is applied towards meeting the company’s obligation

Subdivision 269-B — Obligations and penalties

269-15 Directors’ obligations

(1) The directors (within the meaning of the Corporations Act 2001 ) of the company (from time to time) on or after the initial day must cause the company to comply with its obligation.
(2) The directors of the company (from time to time) continue to be under their obligation until:
(a) the company complies with its obligation; or
(b) an administrator of the company is appointed under section 436A, 436B or 436C of the Corporations Act 2001; or

(ba)  a small business restructuring practitioner for the company is appointed under section 453B of that Act; or

(c) the company begins to be wound up (within the meaning of that Act).

(2A)  To avoid doubt, if the obligation of the company is an obligation to pay the amount of an estimate of an underlying liability under Division 268, a director is subject to his or her obligation under subsection (1):

 (a)  even if the underlying liability never existed or has been discharged in full; and

(b)  even if the unpaid amount of the underlying liability is less than the unpaid amount of the estimate; and

(c)  at all times on and after the day referred to in paragraph 269-10(5)(b) until the director‘s obligation ceases under subsection (2) of this section, including at any such times before the Commissioner has made the estimate or given notice of the estimate.

Instalment arrangements
(3) The Commissioner must not commence, or take a procedural step as a party to, proceedings to enforce an obligation or to recover a penalty, of a director under this Division if an * arrangement that covers the company’s obligation is in force under section 255- 15 (Commissioner’s power to permit payments by instalments).
Note 1: The arrangement may also cover other obligations of the company.
Note 2: Subsection (3) does not prevent the Commissioner from giving a director a notice about a penalty under section 269-25

Subdivision 269-20 Penalty

Penalty for director on or before the due day
(1) You are liable to pay to the Commissioner a penalty if:
(a) at the end of the due day, the directors of the company are still under an obligation under section 269- 15; and
(b) you were under that obligation at or before that time (because you were a director).
Note: Paragraph (1)(b) applies even if you stopped being a director before the end of the due day: see subsection 269- 15(2).
(2) The penalty is due and payable at the end of the due day.
Note: The Commissioner must not commence proceedings to recover the penalty until the end of 21 days after the Commissioner gives you notice of the penalty under section 269-25.
Penalty for a new director
(3) You are also liable to pay to the Commissioner a penalty if:
(a) after the due day, you became a director of the company and began to be under an obligation under section 269- 15; and
(b) 30 days later, you are still under that obligation.
(4) The penalty is due and payable at the end of that 30th day.
Note: The Commissioner must not commence proceedings to recover the penalty until the end of 21 days after the Commissioner gives you notice of the penalty under section 269-25.
Amount of penalty
(5) The amount of a penalty under this section is equal to the unpaid amount of the company’s liability under its obligation.
Note 1: See section 269-40 for the effect on your penalty of the company discharging its obligation, or of another director paying his or her penalty.
Note 2: See section 269-45 for your rights of indemnity and contribution.

For more information about director penalties, tax enforcement, and how to respond to financial and insolvency pressures as a director, check out these blog posts:


How to recharge your cash (and energy) levels

How to recharge your cash (and energy) levels

Estimated reading time: 6 minutes

As a small business owner, what should you do when your cash — as well as your own energy — is starting to run out? Here we offer some practical suggestions.

How to thrive in a tough industry 101

How to thrive in a tough industry

Estimated reading time: 0 minutes

Some businesses in Australia are more likely to struggle than others, not because of how they are run, but due to their industry. Here we offer some practical tips on how to nevertheless thrive in these sectors.