What is a Director Penalty Notice?

The Taxation Administration Act 1953 (TAA) empowers the Commissioner of Taxation to take action against directors to recover unpaid Pay As You Go (PAYG) withholding amounts and unpaid Superannuation Guarantee Contribution (SGC) obligations.

Pursuant to the TAA, directors are under an obligation to ensure that companies meet their taxation liabilities on time and in full. The failure to ensure the company meets that obligation results in the director being personally liable for a penalty for the sum of the unpaid PAYG or SGC.

A Director Penalty Notice (DPN) is, as the name suggests, a notice to a director that he or she is personally liable for the company’s taxation debt, and that certain steps must be taken in order to avoid formal recovery action for the sum of the outstanding debt. It acts as a last written warning from the Commissioner before recovery proceedings are commenced.

It is one of the rare situations where a creditor can pierce the corporate veil and cause the director to become personally responsible for the delinquency of his or her corporate entity.

Important issues to consider about DPNs

  • A director cannot avoid the personal liability for the penalty by resigning as director of the company. Once the penalty has arisen, the director should not resign from the company, as once he does he loses control to remit the penalty and could be left with the personal liability.
  • Conversely, a new director being appointed to a company that is delinquent in meeting its taxation obligations has 30 days from appointment to cause the company to meet all of its outstanding tax debts. After that, it will become liable for a penalty and the Commissioner can issue a director penalty notice.
  • A new director that comes in to a company with unreported and unpaid liabilities has three months to deal with the delinquency or any DPN issued will be a ‘lockdown DPN’.
  • A DPN can be issued on an estimated assessment raised by the ATO, so failing to submit lodgements does not put you outside the scope of the ATO’s DPN power, and actually makes you more susceptible to a ‘lockdown DPN’.

What to do if you, or your client, receive a DPN.

The answer will depend on whether it is a standard DPN or a ‘lockdown DPN’.

A standard DPN can be dealt with by either:

  1. Causing the company to pay the debt within 21 days.
  2. Appointing an administrator under Part 5.3A of the Corporations Act. This is a strict process that should be considered where there is value in saving the company.
  3. Commencing the process of liquidation. A company in a dire financial position that has little to no chance of trading through its financial difficulties should be put into liquidation, as opposed to wasting financial resources attempting an administration.

A ‘lockdown DPN’ will identify itself by stating in a cover letter that the only way to remit the personal penalty is to pay the debt within 21 days from the date of the letter enclosing the notice. A director in this situation really has no alternative but to cause the company to pay the debt in order to avoid personal liability. If payment is not made, the director will become personally liable for the company’s tax debt identified in the DPN.

If none of the steps are taken: the defences available to directors

The legislation provides three avenues of defence to proceedings for recovery following a DPN:

  1. The director was seriously unwell or had some other good reason not to be participating in the company’s management, so that someone else was responsible for meeting the taxation obligations. This is a difficult defence to pursue as the “illness or other good reason” must be applicable for the whole time the director is in office (a scenario which is unlikely).
  2. The director took all reasonable steps to ensure one of the three alternative was met. The taking of steps must apply for the whole period, from the due date to the expiry of the notice. Another difficult defence, as the director has to show that he pursued the other alternatives, if one of them was unsuccessful (it is not enough to take reasonable steps to achieve one of the outcomes).
  3. There were no reasonable steps the director could take to achieve one of those three outcomes. There has been little judicial consideration of this defence, but we believe it would be necessary to show the circumstances meant that the director was simply unable to take any of the prescribed actions.

Final points 

The Commissioner may seek to recover from co-directors part or all of the debt, to a total sum of the total amount of the company liabilities. Usually, the Commissioner will consider the financial position of directors and pursue the ‘best bet’. Payments made by any one director will reduce the total amount payable by each of them.

Where the Commissioner makes a recovery from a director under the DPN regime, that director has rights, by way of indemnity, subrogation or set-off, to recover from the company the amount he or she paid in respect of the company’s taxation obligations.


For more information about DPNs, please contact:

Nell McGill | Senior Lawyer
P: +61 2 4040 1000
nell@lbclawyers.com.au