Restructuring & Insolvency

Director penalty notice

A Director Penalty Notice (DPN) is a powerful tool used by the Australian Taxation Office (ATO) to convert certain debts of a company to a director’s personal debt. A DPN can arise from unpaid PAYG, SGC and GST. GST’s addition to this group is effective 1 April 2020.

When a director becomes liable
A director becomes liable to a penalty at the end of the day the company is due to meet its obligation but fails to do so. At this time, the penalty is created automatically. The ATO does not need to take any action to create the penalty. The ATO may then, at its discretion, issue a DPN to a director seeking payment of the penalty amount.

 The Commissioner, however, must not commence proceedings to recover a director penalty until 21 days after a DPN is issued.

There are two types of DPNs: non-lockdown penalty notices and lockdown penalty notices. Both are explained further below.

Directors’ liability for payment?
Directors can be liable to pay the company’s debts, under a DPN, if they:

  • Were a director when the company failed to pay the relevant amounts on the date they were due; or
  • Became a director after the date the payment was due and are still a director 30 days after the amount was due but is still unpaid. Liability for tax debts accruing before the individual became a director is therefore possible.

Non-lockdown DPNs
Non-lockdown DPNs are issued to company directors that have:

  • Lodged the company’s business activity statements and instalment activity statements within three months of the due date for lodgement; or
  • Lodged Superannuation Guarantee Charge (SGC) statements within one month and 28 days after the end of the quarter that the superannuation contribution relates to; and
  • The PAYG withholding, GST and/or SGC debts remain unpaid.

The notice gives directors 21 days to:

  1. pay the penalty;
  2. appoint an administrator; or
  3. place the company in liquidation.

On day 22, the penalty, by law, becomes a debt of the director. There is no discretion on this point.

Lockdown DPNs
Lockdown DPNs were introduced to deal with directors seeking to conceal ATO obligations by simply not lodging. Use of these notices become available to the ATO when a company fails to lodge its business activity statements and instalment activity statements within three months of the due date for lodgement. In relation to superannuation, the SGC statement is due within one month after the date the superannuation contributions were due to be paid.

This is demonstrated in the table below:


* may be a later date if lodged by tax agent.
** GST will be added to the DPN scheme on 1 April 2020.

The penalty permanently locks down on the director on the lockdown day and there is no ability to avoid the penalty, other than by paying the debt in full. Placing the company into administration or liquidation does NOT provide a defence for a lockdown DPN.

The process of issuing a DPN
Some important aspects of the ATO issuing and recovering a DPN:

  • director penalties are automatically created pursuant to the workings of the Taxation Administration Act 1953 (Tax Act). However, the Commissioner of Taxation must follow a specific procedure before starting proceedings to recover that debt;
  • if the Commissioner determines it is ‘fair and reasonable’ for a director to pay the outstanding tax, they will issue a DPN;
  • the Commissioner will not start proceedings to recover the debt until 21 days after the DPN is issued;
  • DPNs are issued to directors individually. Directors are jointly and severally liable for the debt and will each owe the same amount of money under the DPN;
  • if the company pays all or a portion of the debt causing the DPN to arise, the debt due from the director will decrease by that amount;
  • a DPN notice is issued on the day it is posted to the director’s address listed in the company records maintained by ASIC. If the address listed with ASIC is no longer current, the DPN is still considered to be validly issued; and
  • the ATO may send a copy of the DPN to the director’s registered tax agent as an additional way of bringing the penalty to the director’s attention; however, if the tax agent does not bring the notice to the director’s attention, the notice is also still considered to be validly issued.

Note that the ATO can collect tax in other ways, for example by withholding a tax refund or issuing a garnishee notice. The ATO has the power to issue a garnishee notice to any third party that owes or holds any money on behalf of the company. A garnishee notice requires the third party to pay money directly to the ATO.

A garnishee notice can require payment of a percentage of the debt, or funds held, or may seek payment of a lump sum amount up to the ATO’s debt. For businesses, the ATO can issue a garnishee notice to a financial institution or any trade debtor.

Defending a DPN
The director penalty regime provides a number of statutory defences which outline circumstances in which a director is not liable for director penalties.

A director will have a defence and not be liable for a director penalty if he can prove:

  • He did not take part (and it would have been unreasonable to expect them to take part) in the management of the company during the relevant period because of illness or for some other good reason; or
  • He took all reasonable steps, unless there were no reasonable steps that could have been taken, to ensure that one of the following three things happened:
  1. the company paid the amount outstanding;
  2. an administrator was appointed to the company; or
  3. the directors began winding up the company.

In terms of reasonable steps, unacceptable defences include:

  • the company had insufficient funds to pay the tax; or
  • a consensus to appoint an administrator could not be reached.

Can previous directors be liable?
The ATO can issue a DPN to a director who has resigned but was a director at the time the debt was incurred.

Satisfying the DPN
Director penalties will be withdrawn if the company pays the outstanding tax at any time. Director penalties will also be withdrawn if, at any time on or before 21 days after a DPN is issued:

  • the company reported its PAYG withholding and GST within three months of the due date for lodgement and lodged its SGC statements within one month after the superannuation contribution was due (i.e. it is a non-lockdown DPN); and
  • the company goes into voluntary administration or liquidation.

As mentioned above, if the company fails to report its PAYG withholding, GST or SGC liabilities within the above time periods, the director penalties cannot be revoked even if an administrator or a liquidator is appointed. The DPN regime imposes a lockdown on a director for liabilities that are unpaid and unreported within their required lodgement periods.

What if the DPN contains estimates by the ATO?
Where the company has failed to meet its reporting requirements for PAYG withholding, GST and SGC, the ATO may issue a DPN based upon the ATO’s estimate.

Directors can submit a statutory declaration or an affidavit to verify the actual amount of the liability, which may reduce or revoke the liability.

Not paying the DPN
If the director is unable to pay the DPN then the ATO may petition the director into bankruptcy. If this is likely to occur, it may be preferable for the director to voluntarily enter into bankruptcy and select the bankruptcy trustee.

Can the director who pays the entire DPN recover amounts back from the other directors?
The legislation outlines the rights of a director who pays a company liability as against the other directors who were also liable to pay the penalty.

To deal with the potential unfairness associated with recovering different amounts from company directors, a right of indemnity and contribution allows directors to recover amounts paid on the company’s behalf against the company or its other directors.

The right of indemnity and contribution seeks to ensure that any one individual, particularly an associate, is not solely responsible for the financial burden caused by the company’s failure to comply with its obligations.

If your business is experiencing financial difficulty, contact us to arrange a free, no-obligation discussion to give you clarity on your position and options available.

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