If you’re a company director in Australia, you need to know about Director Penalty Notices (DPNs). These notices are serious letters from the Australian Taxation Office (ATO) that can make you personally liable for your company’s unpaid tax debts, including PAYG withholding, GST, and super guarantee. A Director Penalty Notice is an official warning that you could be held personally responsible if certain company taxes aren’t paid on time.
Getting a DPN means you must act quickly to protect your own finances—there are strict rules and tight deadlines for what you need to do next. Understanding how DPNs work, and the steps you can take to deal with them, helps you avoid personal risk and stay compliant with tax laws.
Key Takeaways
- DPNs can make you personally liable for certain unpaid company taxes.
- There are different actions and remedies available if you receive a DPN.
- Acting fast and knowing your options is key to protecting yourself.
Understanding Director Penalty Notices
A Director Penalty Notice (DPN) is a powerful tool used by the Australian Taxation Office (ATO) to make company directors personally responsible for certain tax debts when their company fails to meet its obligations. Knowing how DPNs work, which debts they cover, and the ATO’s role is essential for safeguarding yourself as a director.
Purpose and Legal Basis
The main purpose of a Director Penalty Notice is to ensure that company directors take responsibility for their company’s tax and superannuation obligations. Under Australian law, directors must make sure taxes are reported and paid by the due date.
DPNs are enabled through the tax laws in Australia, such as the Income Tax Assessment Acts and the Superannuation Guarantee (Administration) Act. The law allows the ATO to issue a DPN if your company fails to pay specific debts. Once you receive a DPN, you may become personally liable for the unpaid amounts, which means the ATO can seek payment from you, not just the company.
Directors cannot avoid liability simply by resigning or winding up the company after debts have become due. There are only limited defences available, and these defences must be provided to the ATO within the set timeframes.
Key Tax Debts Covered
When you receive a DPN, it usually covers the following tax debts:
- Pay As You Go (PAYG) withholding
- Goods and Services Tax (GST) (including LCT and WET)
- Superannuation Guarantee Charge (SGC)
These are debts your company must report and pay to the ATO. If your company does not report or pay these by the due date, the risk of director penalties increases. The ATO looks closely at whether the company has met its tax reporting and payment requirements.
If you are a newly appointed director, you may get some relief if you act quickly within 30 days of your appointment; this means ensuring the company pays its debts or enters administration or restructuring. Once tax debts are reported late, or remain unpaid, your personal obligation can be locked in, making it vital to act quickly and seek advice if you are unsure.
Role of the ATO in Issuing DPNs
The ATO is responsible for issuing Director Penalty Notices and enforcing collection of unpaid company tax debts. When your company fails to meet its PAYG, GST, or SGC requirements, the ATO may issue you a DPN. This is a formal letter explaining the amounts due and what you need to do.
After a DPN is given, you usually have 21 days to respond. Actions you can take include paying the debt, entering into payment arrangements, or seeking permitted forms of company administration. If you do not act within this period, the ATO can take steps, such as garnisheeing your accounts or starting court action, to recover the amounts from you personally.
The address used for a DPN is the one registered with the Australian Securities and Investments Commission (ASIC), so you must keep your contact details updated to avoid missing critical ATO notices.
Types of Director Penalty Notices
Director Penalty Notices (DPNs) come in two main types: Non-Lockdown DPNs and Lockdown DPNs. The differences between these notices affect what actions you can take and when you become personally liable for unpaid company tax debts.
Non-Lockdown DPNs
A Non-Lockdown DPN, sometimes called a “21-day DPN”, is issued when company tax obligations such as PAYG withholding, GST, or SGC are reported on time through BAS but left unpaid. This notice gives you 21 days from the date it is issued to take action. During this period, you can pay the outstanding debt, appoint a small business restructuring practitioner, voluntary administrator, or place the company into liquidation.
If you act within 21 days, you can avoid personal liability for the debt. However, not responding will result in you becoming personally liable for the unpaid amount. It is very important to pay attention to the deadline and use this window to address the debt.
Key points for Non-Lockdown DPNs:
- Applies to BAS, PAYG, and SGC debts lodged on time but unpaid
- 21-day window to act before liability sets in
- Options include payment, restructuring, administration, or liquidation
Lockdown DPNs
A Lockdown DPN is issued if your company fails to lodge BAS or other required returns (for PAYG, GST, or SGC) by the due date. If these returns are late or not lodged at all, the ATO can issue a Lockdown DPN. With this notice, you become personally liable for the specified tax debts as soon as it is issued.
There is no 21-day grace period with a Lockdown DPN. The only way to avoid personal financial responsibility is to pay the debt in full. You cannot remove your liability by starting restructuring, administration, or liquidation after receiving the notice.
Key features of Lockdown DPNs:
- Applies when BAS or other tax returns are late or not lodged
- Immediate personal liability upon receiving the notice
- Only full payment of the debt can resolve your liability
Personal Liability of Company Directors
As a company director, you may be held personally liable for your company’s tax debts. The law can allow the Australian Taxation Office (ATO) to pursue your personal assets to recover unpaid amounts.
How Directors Become Personally Liable
You become personally liable for specific unpaid company debts if your company fails to meet its obligations. The main types of debts covered are Pay As You Go (PAYG) withholding, Goods and Services Tax (GST), and Superannuation Guarantee Charge (SGC).
When these tax and superannuation liabilities remain unpaid, the ATO can issue a Director Penalty Notice (DPN). Once a DPN is sent, you may have only 21 days to take action such as paying the debt, appointing an administrator, or winding up the company. Failing to act within this time frame means the ATO can hold you personally responsible.
There are two types of DPNs: the 21-day DPN and the lockdown DPN. For amounts reported late, a lockdown DPN may apply, making you automatically liable with no way to avoid it except paying the debt in full.
Impact on Personal Assets
Personal liability means the ATO can seek payment from your own assets—not just the company’s. This can include your bank accounts, property, and even other personal investments.
If payment is not made, the ATO may issue a garnishee notice against your accounts or commence legal action to recover the money. It is important to keep records updated because the ATO will use your last known address for all notices.
Being made personally liable can have significant effects on your finances. You could be forced to sell personal assets or have money directly taken from your bank if the debt remains unpaid.
Relationship with Company Debts
The liability you face as a director is considered ‘parallel liability’. This means the director’s personal debt runs alongside the company’s original debt.
If your company has several directors, each director is usually liable for the same unpaid amount. Paying part of the debt—for example, if you or the company pay $1,000 of a $4,000 debt—reduces the liability for everyone involved.
It is worth noting that resigning as a director does not remove your liability for debts that existed or started while you were in office. The director penalty system allows the ATO to seek payment from the company, any current directors, or former directors, depending on the circumstances.
Director Options and Remediation Actions
If you receive a Director Penalty Notice (DPN), you have several clear options to deal with your personal liability. It is important to act quickly, as delays may reduce your choices for resolving the debt and limit your rights.
Paying the Tax Debt
The most direct way to remove your personal liability is to pay the unpaid tax debt in full. This includes Pay As You Go (PAYG) withholding, Goods and Services Tax (GST), and Super Guarantee Charge (SGC) amounts listed on the DPN.
Payment must be made within the timeframe given on the notice. For most DPNs, you have 21 days from the date the notice is issued. If you pay off the full debt, both your director penalty and the company’s liability for that amount are cleared.
If there are multiple directors, payment made by any one director or by the company will reduce everyone’s liability for the same reporting period. Keep records of payments and confirm with the Australian Taxation Office (ATO) that the payment was correctly applied. Ignoring the DPN will not make it go away, and legal action can follow if the debt is not paid.
Appointing an Administrator or Liquidator
You can also deal with a DPN by moving the company into administration or liquidation under the Corporations Act 2001. Appointing an administrator means handing over control of the company to an external expert who will assess if the business can keep trading or needs to be wound up.
A liquidator is appointed if it is clear the company cannot pay its debts and must be closed down. This process involves the official sale of company assets to pay creditors, including the ATO.
Your personal liability for the director penalty can be reduced or cancelled if administration or liquidation is started within the timeframe given in the DPN. Acting after the deadline will not protect you from the penalty. It is critical to seek advice quickly and to follow the correct steps when appointing an administrator or liquidator.
Involving a Small Business Restructuring Practitioner
If your company qualifies as a small business, you can engage a small business restructuring practitioner. This is a newer process under Australian law, designed to help struggling small businesses manage debts and avoid liquidation.
The practitioner will help your business prepare a restructuring plan. Your creditors, including the ATO, will need to agree to the plan. If approved, the business may continue trading while following the agreed payment terms.
To remove your personal liability as a director, you must appoint a restructuring practitioner within the DPN deadline. This option is only available for certain small businesses, so you will need to confirm your eligibility. Engaging a restructuring practitioner is often faster and less disruptive than liquidation.
Entering a Payment Plan
If your company cannot pay the full debt straight away, it may be possible to enter a payment plan with the ATO. A payment plan does not always remove the director penalty unless it is part of meeting one of the formal requirements, like administration or restructuring, within the notice’s timeframe.
Payment plans are negotiated based on your company’s ability to pay. This can help you avoid immediate legal action from the ATO, but if payments are missed, the director penalty can still be enforced.
A payment plan should be put in place quickly after receiving a DPN. Keep in mind that entering a plan does not automatically cancel your liability, but it can help manage cash flow and demonstrate a willingness to resolve the debt.
ATO Enforcement and Recovery Processes
If you become personally liable under a Director Penalty Notice (DPN), the Australian Taxation Office (ATO) can take several strong actions to recover the debt from you directly. These methods can seriously affect your finances and legal standing.
Garnishee Notices
A garnishee notice is a legal tool the ATO uses to collect debts when you do not pay after receiving a DPN. The ATO may send the notice to your bank, employer, or third parties holding your funds.
When a garnishee notice is issued, the recipient (such as your bank) must pay funds to the ATO from your account. Your employer may also be instructed to take out a portion of your wages until the debt is cleared.
The ATO can recover all or part of the director penalty with this notice, and you may not get advance warning. This can have an immediate effect on your available money, so it’s important to act quickly if you get a DPN.
Bankruptcy Risks
If the director penalty is not paid, the ATO can take steps that may lead to bankruptcy. Bankruptcy is a formal process where your assets may be sold to pay outstanding debts.
The ATO may apply to court for a bankruptcy notice after failing to recover debts through other means. If you do not respond, pay, or make an arrangement, the court may declare you bankrupt.
Bankruptcy affects your credit rating, ability to manage a company, and your personal assets, including your home or car. You may face restrictions from the Australian Securities & Investments Commission (ASIC) as well, like being banned as a company director for a set period.
Further Legal Action
The ATO has the power to start court proceedings against you if debts remain unpaid. This can result in a court judgment ordering you to pay the amount owed under the DPN.
Legal action may involve the ATO seeking to enforce debts through property seizure or selling certain personal assets. In some cases, ongoing court involvement adds legal costs to your debt.
Being subject to a court judgment can affect your credit history, make it harder to get finance, and put future business activities at risk. Legal action by the ATO is a serious step after a DPN and signals their intent to collect the debt no matter the method.
Defences and Preventative Measures
You have several legal options if you receive a Director Penalty Notice (DPN), but acting quickly is critical. Staying informed about your duties and implementing proper systems can prevent personal liability and protect your business operations.
Valid Legal Defences
A director may defend against personal liability for a DPN in limited circumstances. You may have a valid defence if you can prove that, due to illness or another good reason, you could not take part in the management of the company during the time the liability arose.
Another defence applies if you took all reasonable steps to:
- ensure the company paid its debts
- appoint an administrator
- appoint a small business restructuring practitioner
- place the company into liquidation
If you did not manage the company due to illness, you will usually need evidence, such as medical reports. The burden of proof is on you as the director, so keep proper records to support any possible defence.
Director Responsibilities and Best Practices
As a director, you must ensure your company meets its tax and superannuation reporting and payment obligations on time. Set up clear processes for regular financial checks. Appoint a qualified bookkeeper or accountant to manage lodgements and payments. Hold frequent board meetings to review business debts and monitor compliance.
Keep detailed records, including dates and actions taken. If an issue arises, act early—seek professional advice and involve all directors in decision-making. Regular training on legal duties can lower risk and strengthen business operations.
Avoiding Future DPNs
To avoid receiving a DPN in the future, make sure all company tax liabilities are reported and paid by the due dates. Use reminders or automations to track PAYG withholding, GST, and superannuation payments. If the business struggles to pay, contact the ATO immediately to discuss arrangements.
Consider putting policies in place to check outstanding debts before new directors are appointed. When leaving a director role, confirm all company obligations are up to date to prevent ongoing liability. Building these habits not only limits your personal risk but also protects the business.
Frequently Asked Questions
Directors can take specific steps if they receive a penalty notice from the ATO. These include seeking payment options, understanding available legal defences, and knowing how notices apply during company liquidation or business shutdowns.
How can a director negotiate a payment plan for a penalty notice issued by the ATO?
You can contact the ATO as soon as you receive a director penalty notice to request a payment plan. The ATO may allow you to pay the penalty in instalments if you explain your financial situation and show willingness to resolve the debt.
It is important to engage with the ATO promptly. Ignoring the notice or not acting may lead to legal actions or garnishee orders against your personal assets.
What are some defences a director may have against a penalty notice issued for company debts?
You may have a defence if you can show that you took all reasonable steps to make sure the company met its tax and superannuation obligations. This could include attempting to pay debts, appointing an administrator, or starting the company’s winding up process.
Another defence is if you can prove you were ill or had other good reasons preventing you from taking action. The law allows you to present a defence within strict time limits.
In what scenarios might a director receive a penalty notice after a company has entered liquidation?
You could still receive a penalty notice if the company had tax or super liabilities that were unpaid before liquidation began. The ATO can hold directors personally responsible for these debts even after liquidation starts.
If a director resigns just before liquidation, they can still be liable for unpaid amounts that were due before their resignation. Timing of resignation and company debts matters for liability.
What does a typical director penalty notice entail, and what actions should a director take upon receipt?
A director penalty notice clearly states the unpaid amounts and outlines options to resolve the debt. The notice will mention a 21-day period to pay the debt, appoint an administrator, or wind up the company, depending on the situation.
Upon getting a notice, you should act quickly—pay the amount if possible, or seek advice on administration or restructuring if you cannot pay.
How does a director penalty notice impact personal liabilities during periods of lockdown or business interruption?
Director penalty notices still apply even during lockdowns or if the business faces unexpected interruptions. If your company fails to report or pay its tax debts on time, you can be held personally liable, no matter the business environment.
The rules for liability have not changed for these circumstances, so it is important to keep lodgements and payments up to date despite disruptions.
What legislative changes have affected the issuance and enforcement of director penalty notices?
Rules have expanded over time to include more types of debts, such as GST and superannuation, making directors personally liable for these unpaid amounts. The time allowed to report or pay before personal liability applies has also changed for some debts.
Recent updates mean that directors are now liable for more debts and face stricter reporting deadlines. This has made timely compliance even more critical.