Director Penalty Notices: What Every Company Director Needs to Know (and How to Protect Yourself)
Understanding the ATO framework that can make directors personally liable for company tax debts
If you’re a company director in Australia, one of the most serious enforcement instruments you need to fully understand is the Director Penalty Notice — commonly referred to as a DPN.
Why?
Because a DPN can make directors personally liable for certain company tax and superannuation obligations, and this personal exposure arises far earlier and more automatically than many directors realise.
Below is a structured, plain-English breakdown of the system:
what a DPN is, when liability arises, what options exist, and how to protect yourself and your business.
What Is a Director Penalty Notice?
A DPN is a notice issued by the ATO that enables it to recover unpaid tax liabilities from company directors personally when the company fails to meet certain obligations.
The relevant debts are:
- PAYG withholding
- Net GST (including GST, WET, LCT)
- Superannuation Guarantee Charge (SGC)
Importantly:
Personal liability technically arises by operation of law when the company fails to meet the tax obligation by the due date — even if the ATO has not yet contacted you.
The DPN is simply the mechanism used to enforce recovery.
Two Types of DPNs (and Why They Matter)
Not all DPNs are equal — and the type you receive determines what options remain available to avoid personal liability.
1. Non-Lockdown DPN
(Returns/lodgements were made on time)
If the company lodged its BAS/IAS within 3 months of their due date, and SGC statements by their deadlines, the ATO may issue a non-lockdown DPN.
You then have 21 days from the date on the notice to do ONE of the following:
- Pay the debt in full, or
- Appoint a voluntary administrator, or
- Appoint a liquidator, or
- Enter Small Business Restructuring (SBR).
If you act within 21 days → your personal liability is remitted (erased).
If you do nothing → you become personally liable.
2. Lockdown DPN
(Returns/lodgements were late — or not lodged at all)
If the company failed to lodge BAS/IAS/SGC statements on time, the ATO will issue a lockdown DPN.
Key difference:
There is no ability to remit liability through liquidation or administration.
The only way to clear the penalty is full payment by the company — or by the director personally.
This is why you must always lodge — even when you cannot pay.
The 21-Day Countdown Rule
The 21-day period begins on the date printed on the notice, not when it’s opened or received.
- Mailing delays don’t extend the deadline
- Public holidays don’t extend it
- Incorrect address records don’t matter
If the 21 days expire without action, the liability becomes fixed and irreversible — even if you later appoint an administrator.
What Happens If You Don’t Act?
Once the 21-day period expires, the ATO can take recovery actions including:
- Bank garnishee directions
- Offset of tax refunds
- Commencing court action
- Bankruptcy proceedings
Directors are jointly and severally liable — meaning the ATO can pursue 100% of the debt from any one director, not just their proportionate involvement.
Small Debts and the Reality of Administration
(Extremely Relevant to Small Businesses)
Many small companies incur relatively modest tax debts — sometimes as low as $10,000. While the law technically allows directors under a non-lockdown DPN to appoint a voluntary administrator or liquidator to remove personal liability, this is rarely practical for smaller amounts, because external administration normally costs between $5,000 and $25,000 in fees.
For small debts, a far more realistic and cost-effective approach is often:
- Negotiating a payment arrangement with the ATO
- Requesting remission or deferral
- Providing financial hardship documentation
- Engaging an accountant or tax adviser to negotiate with the ATO on your behalf
The ATO is often receptive to businesses that:
✔ lodge on time
✔ communicate early
✔ demonstrate genuine financial difficulty
In summary:
While external administration is legally permissible, it is usually economically disproportionate unless the business is genuinely insolvent or unable to continue trading. For many small operators, early communication and structured repayment directly with the ATO is the best option.
Can You Defend a DPN?
There are only three statutory defences — interpreted conservatively:
- You were genuinely unable to manage the company due to severe illness/incapacity
- You took all reasonable steps to ensure the debt was paid or the company entered administration
- For GST/SGC matters: you held a reasonably arguable legal position
These defences are rare. For most directors, they will not succeed.
New Directors: A Hidden Trap
If you’re appointed as a company director, you have 30 days to ensure the company:
- pays its existing ATO liabilities, or
- appoints a liquidator, administrator or enters SBR.
If you do neither, you may become personally liable for tax debts that arose before you joined.
Resigning within the 30-day period does not protect you.
Former Directors Are Not Safe
Resigning does not extinguish liability.
If unpaid liabilities arose while you were a director, a DPN can still be issued to you later — even years after departure.
Deregistered Companies
The ATO can still issue a DPN after deregistration.
In the case of a non-lockdown DPN, the company may need to be reinstated (often through the court system) within the 21-day window so that a liquidator can be appointed. This can be complex, stressful and costly.
Common Mistakes and Pitfalls
- Using the envelope date instead of the notice date
- Assuming payment plans pause enforcement (they don’t)
- Lodging BAS/SGC late
- Not updating ABR, ASIC and Director ID contact details
- Thinking another director is “handling it”
- Allowing the company to be deregistered
In all cases, timing and compliance discipline are critical.
How to Protect Yourself as a Director
✔ ALWAYS lodge on time — even if you cannot pay
✔ Keep corporate and Director ID addresses current
✔ Monitor ATO portal balances
✔ Take action immediately upon receiving a DPN
✔ Seek professional guidance early
Avoiding or ignoring the issue only removes your pathways.
Final Takeaway
A DPN is not merely a warning — it is a legal instrument that can pierce the corporate veil and make you personally liable. Early communication, timely lodgement and proactive administration are your best protections.
Need Help or Advice?
If you have received a DPN — or suspect one may be imminent — you should seek professional advice promptly. Your options and the outcome are highly time-dependent.
