Director Penalty Notices: What You Need to Know

Over the past 18 months, the Australian Tax Office (ATO) has begun its intensified efforts in recouping many tax debts and outstanding taxation and superannuation obligations from small businesses, previously provided a limited-time amnesty.

As at 2024, unpaid taxation liabilities currently accounts for $33 billion, therefore the ATO is now actively pursuing debt recovery interests – with a new surge of Director Penalty Notices (DPN) being issued.

With an increased ATO mandate, it is critical for business owners to understand the implications of DPNs and the potential options available to them, where one has been issued.

What is a Director Penalty and Director Penalty Notice

Under the Taxation Administration Act 1953 (TAA), a company director can be personally liable for the company’s unpaid taxation liabilities, such as Pay-As-You-Go Withholding (PAYG), Goods & Services Tax (GST), and Superannuation Guarantee Charge (SGC).

Therefore, it is prudent for a director to ensure the company’s tax and superannuation obligations are reported and paid on time.

If the company does not comply with paying these liabilities by their due date, the ATO has the right to “pierce the corporate veil” and recover these amounts from a current or former director personally – effectively known as a Director Penalty.

In recovering these amounts, debt recovery action by the ATO is undertaken via the issue of a Director Penalty Notice, outlining unpaid amounts and remission options available.

Understanding the Different forms of DPNs

Through recovery action, the ATO can issue one of two forms of Director Penalty Notices – a Non-Lockdown DPN and Lockdown DPN, dependent on the nature of the penalty and outstanding liabilities.

A Non-Lockdown DPN is issued to a director where the company has outstanding obligations, however, has lodged its Business Activity Statement (BAS), Instalment Activity Statement (IAS), and/or Superannuation Guarantee Charge Statement within three (3) months of their due date.

Where a Lockdown DPN is issued, this is a result of the company failing to lodge its BAS, IAS, and/or SGC statements within three (3) months of its due date.

Potential Course of Action against a Director Penalty Notice

Under a Non-Lockdown DPN, a director may avoid personal liability for the amounts owing by the company, where the company complies with its obligations in paying the amounts owing or places the company into voluntary administration or undertakes a small business restructure or liquidation prior to the expiration of the DPN – which is 21 says from the date of issue.

For a lockdown DPN, the only option available to a director is for the company to comply with its obligations by paying the amounts owing prior to expiration of the DPN, again which is 21 days from the date of issue.

Potential Defence to a DPN

Under the Taxation Administration Act 1963 (TAA), there are two (2) defences which can be raised (if circumstances permit) against personal liability from a Director Penalty Notice.

The Act outlines where the director did not take part (and it would have been unreasonable to expect the director to take part) in the management of the company during the relevant period because of illness or other good reason, personal liability may be removed.

The test for whether a reason for non-participation is “good” was established in Deputy Commissioner of Taxation v Lesley Frances Robertson [2009] NSWSC 597 as:

“The reason advanced must objectively be a good reason. For example, a total failure to participate for whatever reason should not be regarded as a ‘good reason’. In determining what may be a good reason for not participating in the management for a company, regard must be had to the highest standard of care and skill now required of directors. The plaintiff submitted that a director who by a course of conduct is inattentive to the affairs of the company is unlikely to have the benefit of this defence. For example, it would not be sufficient if the director held a genuine view that he or show had good reason for not participating unless it were a ‘good reason’ when view objectively”.

Second, the director took all reasonable steps to ensure that either:

1. The company paid the amount outstanding; or
2. An administrator, a small business restructuring practitioner, or liquidator was appointed to the company.

It is important that where a DPN has been issued to a company, advice is sought from a legal practitioner as well as associated advisers.

Conclusion

If you are a director who has received a DPN or your company has a outstanding ATO debt or superannuation obligations, please contact our team, as we can assist you by reviewing the company’s financial position and provide our advice on the options available.