Author
Mitch BallChief of Insolvency Operations & ASIC Registered Liquidator
(02) 9220 7117
A Director Penalty Notice (DPN) is a notice issued by the Australian Taxation Office (ATO) to the director(s) of a company that has defaulted on its tax obligations. The DPN is issued when the company has not paid and/or reported its tax obligations or has significant debt. The Director Penalty Notice outlines the director is personally liable for penalties equal to the unpaid funds.
Types of Director Penalty Notices
There are two types of Director Penalty Notices:
- 21-Day Director Penalty Notice
- Lockdown Director Penalty Notice
Deciphering the differences can be confusing. As a director, you need to determine which type of Director Penalty Notice you have received from the ATO.
21-Day Director Penalty Notice
The most common type of DPN issued, a 21-Day Director Penalty Notice is a DPN that requires ”action” within 21 days. The 21-Day DPN is issued by the ATO when the company’s tax liabilities have not been paid, however, they have been reported to the ATO within a three-month period.
It is imperative to note that the 21-day period begins from the date of issue listed on the DPN, not the date it was received. A failure to comply may result in the ATO commencing proceedings against Directors personally.
Lockdown Director Penalty Notice
A Lockdown Director Penalty Notice is issued when a company’s tax debt has not been paid and has not been reported to the ATO within the last three months of the due date.
Business Activity Statements (BAS) and Income Activity Statements (IAS) must be lodged within 3 months of their due date, while Super Guarantee Charge (SGC) statements must be lodged within 28 days after the end of the quarter to which the contribution relates.
The term ‘lockdown’ is used because this type of DPN can only be resolved by paying the full amount owed, no other options are available.
What are my options when I receive a DPN?
Receiving a Director Penalty Notice can be daunting, especially when you don’t know what the solution is.
Your possible options are:
- Repay the debt in full by the nominated date
- Arrange a DPN payment plan with the ATO to pay off the debt
- Voluntarily wind up your company’s affairs through liquidation
- Appoint an administrator to enter voluntary administration
- Defend the Director Penalty Notice
Consider All Options
If the DPN stems from deeper financial issues within the company, we might suggest a business restructure, which could involve:
- Reevaluating operational efficiencies
- Cutting unnecessary costs
- Overhauling your current business model to maximise profitability
Restructuring can be a practical way to regain control, giving your business room to recover while we address the issues that led to the DPN.
Engaging a small business restructuring practitioner is essential. Not only can we guide you through the process, but also help avoid potential consequences and personal liability, while ensuring future compliance and sustainability.
Who will be sent a Director Penalty Notice?
A DPN will be sent to all company directors, including associates who were involved at the time the company failed to pay its tax debts. Under s995-1 of the Income Tax Assessment Act, an ‘associate’ includes those related by blood or law.
Confusion arises when a director is new. A DPN will not apply to new directors straight away. If you become a director after the due date of the DPN, but remain a director for 30 days afterwards, you will also become liable. This period grants the new director time to assess whether there is a backlog of PAYG and SGC and either act on it or resign.
Possible defences for Director Penalty Notices
There are a few accepted statutory defences to Director Penalty Notices, in which case a director will not be held liable for director penalties:
1. Illness
If the director had an illness that prevented them from participating in the management of the company, this may be a defence to a DPN.
2. Reasonable steps
If it can be shown that the director took all reasonable steps to ensure the company was compliant with tax obligations, then they will not be liable for the DPN.
3. No part
You may be able to defend yourself if you can prove that you weren’t genuinely involved in managing the company. However, this defence is hard to establish, as the law requires a ‘good reason’ for a director’s lack of involvement in management.
This often applies in cases where, for example, a spouse owns the company and you’ve agreed to be listed as a director just to help out.
4. Attempted payment
If a director attempted to ensure the company paid its tax obligations but was prevented from doing so due to a dispute with other directors, they may be able to raise a defence—provided they can prove they took reasonable steps to make the payment.
In situations where one director did pay the DPN, under s269-45 of the Taxation Administration Act 1953, there is a right of indemnity available for that director and any other director who was equally liable.
5. No receipt
It is unlikely you’ll be able to claim a defence based on not receiving the DPN. There have been court cases where the ATO has provided evidence that it had sent the DPN to the correct address.
6. Super Guarantee Charge
In regards to SGC, there is an additional defence available. If it can be shown that the company took reasonable care to pay the superannuation liability, but it was not paid for some good reason, the Superannuation Guarantee (Administration) Act 1992 provides for a 60-day period to raise a defence.
How will safe harbour impact Director Penalty Notices?
The introduction of safe harbour provisions in late 2017 has influenced how director liability is assessed under DPN laws. Key points include:
- Reduced personal liability: Safe harbour provisions remove personal liability for company debt incurred during insolvency, provided specific conditions are met.
- Focus on turnaround efforts: To qualify, a director must demonstrate they were actively taking steps to turn the business around.
- Strong plan: The director’s plan must be reasonably likely to lead to a successful recovery.
- Limitations: Safe harbour does not apply where there has been:
- Reckless behaviour
- Intentional disregard of tax obligations
Director Responsibilities, Role and Risks
Staying informed and proactive in your fiscal management protects your business’s financial health and shields you from potential personal financial risks. Your key responsibilities as a director revolve around managing your company’s finances, including:
- Ensuring all financial reports are accurate and reflect your company’s financial position, providing transparency and reliability for stakeholders.
- Keeping up with tax filings and payments so they are completed on time to avoid penalties or legal complications. These include:
- Pay As You Go (PAYG)
- Superannuation Guarantee Charge (SGC)
- Goods and Services Tax (GST)
- Actively monitor your company’s compliance with tax laws, proactively managing any discrepancies or issues before they escalate.
FAQs
What are my liabilities as a former director of a company that has received a DPN?
If you are a director of a former company that has received a Director Penalty Notice, you may still be liable for the company’s tax obligations. You can still be held responsible for the debt outlined in the DPN, but certain criteria must be followed.
As a former director, you can be liable if the following has occurred:
- The unpaid PAYG withholding, net GST or SGC liabilities were due before the date of your resignation.
- The tax obligations of the company fell due after your resignation when:
- The PAYG withholding, net GST or the first withholding event in the reporting period occurred before your resignation.
- The SGC liabilities date charge became payable.
What is Director penalty parallel liability?
Despite having the ability to chase both the company and Directors personally for unpaid debts, the ATO is not allowed to collect the debt twice. Director Penalty Notice legislation prescribes that a Director penalty operates in parallel to the liability owed by the company and other Directors who have received a DPN related to the same debt.
If a Director makes part payment or payment in full of their DPN, the company’s liability will be reduced by that amount as will the penalty owed by the other Directors. Similarly, any payment made by the company relating to tax debt will result in Director penalties being decreased by the equivalent amount.
Are directors personally liable for PAYG?
No. Directors only become personally liable for any outstanding PAYG if a DPN is issued due to the outstanding lodgements and tax debt. If that occurs, then the Director automatically becomes liable for a penalty equal to the unpaid amount. As mentioned earlier, there are several options available to the ATO for the purposes of penalty payments including withholding a tax refund. The ATO has the power to pursue Directors to the extent where they face personal bankruptcy.
What happens if my Director Penalty Notice (DPN) has expired?
There is a specific date on the DPN when an action must be taken. If this date has now passed, your options then change.
To avoid personal liability, the outstanding debt must be paid. This may not be an option for some if the company has ceased trading and is unable to repay the debt. If you have exhausted these options and are not in a position to personally repay the debt, then your options are as follows:
- Enter debt negotiation with the ATO
- Enter a debt agreement under Part IX of the Bankruptcy Act 1966
- Enter a personal insolvency agreement under Part X of the Bankruptcy Act 1966
- Enter bankruptcy
What happens if I ignore a Director Penalty Notice?
Ignoring a DPN can have serious consequences. Any form of non-compliance can result in the following:
- You may become personally liable for the company’s tax debt
- You can be issued with a garnishee notice
The onus on being the director can be overwhelming, which is why we highly recommend contacting an insolvency practitioner as soon as possible.
Can a DPN be issued after liquidation?
Yes, the ATO can issue a DPN after a company enters liquidation or administration - but only if PAYG, GST, or superannuation weren’t reported on time. In that case, a lockdown DPN applies, making directors personally liable. Timely lodgement protects directors from personal liability under a non-lockdown DPN, i.e. a 21-day DPN.
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