The Australian Taxation Office (ATO) has cracked down on issuing and enforcing DPNs in the last year, with over 30,000 being issued over the last financial year.
Company directors are responsible for ensuring that the company’s taxes and superannuation are reported and paid on time. It is important for directors to know the implications and obligations associated with DPNs to avoid potential financial and legal ramifications, which include personal liability for company debts.
Key Takeaways
- Swift action is pivotal if you receive a DPN.
- Non-compliance with a DPN triggers debt recovery consequences against a director personally.
- Directors become personally liable for the tax debt, face legal action from the ATO, risk bankruptcy, and have their bank accounts garnished for the debt.
- A DPN will remain on foot until it is repaid in full, either in accordance with the DPN or another arrangement made with the ATO.
- Make sure your ASIC address is up to date, as the DPN will be sent to the ASIC registered address.
What is a DPN?
A Director Penalty Notice (DPN) is a legal document issued by the ATO to a director of a company making them personally liable for a tax debt owed by the company. DPNs have serious consequences and are used by the ATO to recover unpaid Pay As You Go (PAYG) withholding, GST and Superannuation Guarantee Charges (SGC) liabilities from the director(s) themselves.
Under Australian law, the Taxation Administration Act 1953 (Cth), directors have a legal responsibility to ensure that their company meets its tax obligations. When a company fails to meet its taxation obligations, the ATO may issue a DPN to the company directors personally, informing the director(s) that the amounts are now personally owed.
The ATO will use the ASIC database to determine the address for service. You must ensure the ASIC database is up to date with the current address for the director(s), as it will be deemed to have served the DPN on the director at that address, even if the ASIC address was outdated. Therefore, you may never know you received a DPN until you are being sued by the ATO.
There are two types of DPNs that can be issued, one being a “non-lockdown DPN” and the other a “lockdown DPN”.
Non-Lockdown DPN
This type of DPN is issued to a director where the Company has outstanding obligations but has already lodged a Business Activity Statement (BAS), Instalment Activity Statement (IAS) and or SGC Statement within 3 months of their due date.
Once a director is issued a non-lockdown DPN they have 21 days to either:
- Pay the penalty amounts in full or negotiate a payment plan with the ATO;
- Appoint a voluntary administrator to the company;
- Appoint a small business restructuring practitioner; or
- Appoint a liquidator.
If any of the above actions are taken, the penalty is remitted as a personal liability. If a director fails to respond to the DPN within 21 days the director penalty locks down and the ATO can then commence recovery proceedings against the director. The ATO may:
- Issue a garnishee notice;
- Offset the director’s personal tax credits against the penalty amounts; or
- Commence legal action against the director for debt recovery.
Failure to address a DPN can negatively impact a director’s credit rating and financial standing.
Lockdown DPN
This type of DPN is issued to a director if the Company has failed to lodge its BAS, IAS and or SGC Statements within 3 months of its due date.
The only means of responding to a lockdown DPN is to pay the penalty amount in full to the ATO. Placing a company into voluntary administration or liquidation will not get rid of the personal liability of a director. The DPN will remain on foot until full repayment of the debt.
Responding to a DPN
Directors who receive a DPN should take immediate action to address the situation. This may involve:
- Seeking professional advice from a solicitor or tax advisor.
- Assessing the company’s financial position and possible options to deal with the liabilities.
- Negotiating with the ATO a payment arrangement or seeking alternative solutions.
- Considering the consequences of personal liability like your personal assets.
- Consider whether the Company needs to be placed into Voluntary Administration or Liquidation.
It is strongly encouraged to speak to us and obtain legal advice as soon as you receive the DPN.
Defences to Director Penalty Notices
Two primary defences against personal liability are presented:
- Non-management of company due to Illness: Personal liability may be removed where a director did not take part in the management of the company during the relevant period due to illness or another acceptable reason, and where it would be unreasonable to expect the director to take part in the company’s management; and
- Reasonable steps: Evidence must be provided that the directors took all necessary actions for compliance and reasonable steps, for example by paying the outstanding amount, or evidence that an administrator, small business restructuring practitioner or liquidator was appointed to the company.
The courts have determined that a defence must cover the entire period of the director’s obligation to ensure the company’s liabilities are paid.
Contact Us
Please contact us today if you need advice on how to respond and deal with a DPN, contact us today on (02) 9189 5288.
Craig Higginbotham and Nicole Sarraf
12 February 2025
