Director penalty notices — key issues for directors  

The Australian Taxation Office (ATO) has continued to issue an increased number of director penalty notices (DPN) to company directors. In the 2024/25 financial year, the ATO issued 84,000 DPNs in respect of 64,000 companies.¹ This is a substantial increase, even in comparison to the 2022/23 financial year, where the ATO issued 23,000 DPNs in respect of 17,000 companies.²

DPNs are a core element of the ATO’s enforcement toolset, and the ATO has listed the use of DPNs as an enterprise priority in 2025/26 where there has been non-payment of outstanding tax amounts.³ It is therefore critical for directors to understand how DPNs operate, in what circumstances a DPN may be issued, and what steps to urgently take in that event.

What is a director penalty notice?

The director penalty regime operates to hold directors personally liable for specified tax liabilities of their company. The regime broadly applies to a company’s unpaid pay-as-you-go (PAYG) withholding, GST and superannuation guarantee liabilities.

The regime operates by placing a statutory obligation on directors to ensure their company complies with its tax obligations. This obligation commences on the ‘initial day’, that is, the last day of a tax period or GST instalment quarter. If the company fails to comply with its payment obligation by the end of the due day, a penalty equal to the amount of the company’s obligation becomes due and payable by the director.

Directors must understand that, under the legislation, if a company fails to pay its tax debts, their personal liability becomes automatic. The issuing of the DPN is merely an administrative step to permit the ATO to commence recovery proceedings against the director.

The ATO may serve a DPN on any person who was a director at any time during the period when the company did not comply with its tax obligations, even if the director had resigned prior to the date on which the company was required to report or lodge its statements.

Lockdown and non-lockdown DPNs

A DPN will either constitute a lockdown or non-lockdown DPN.

Non-lockdown DPN

If a company has made timely reporting of its obligations (even if they remain unpaid), the ATO will issue a ‘non-lockdown’ DPN. Accordingly, a non-lockdown DPN is issued where the company has lodged its Business Activity Statement (BAS), Instalment Activity Statements (IAS) and/or Super Guarantee Charge Statement (SGC) within the reporting deadlines, but the underlying amounts remain unpaid.

Where the ATO issues a non-lockdown DPN, the penalty will be remitted (i.e. waived) if, within 21 days from the date that the DPN was issued, one of the following occurs:

• the debt is paid in full;
• the director appoints a voluntary administrator;
• the director appoints a small business restructuring practitioner; or
• the company begins to be wound up.

It is critical for directors to be aware that the 21-day period commences from the date that the ATO posts the DPN, and not from the date of receipt, and cannot be extended in any circumstances. Accordingly, directors must take urgent steps to make a relevant appointment within the statutory period; otherwise, the director will be liable to make payment of the full penalty, which will be the only way the penalty can be remitted.

Lockdown DPN

If a company has failed to report its obligations within the statutory reporting period, the ATO will issue a lockdown DPN. Under this form of DPN, the penalty is ‘locked down’ and the only way to obtain remission of the penalty is to make full payment of the debt.

For this reason, it is crucial that directors report their company’s liabilities on time, even if the company is unable to pay the amounts owing on the date of lodgment.

Defences

The statutory defences available to a director have been interpreted extremely narrowly by the courts, and are rarely successful. The defences are discussed below.

Illness or other good reason

A director will not be liable for a director penalty if they can establish that, because of ‘illness or for some other good reason’, it would have been unreasonable to expect the director to take part in the management of the company at that time.

This defence has been interpreted to require that the director must have effectively been incapacitated during the whole of the relevant period.

All reasonable steps

A director will not be liable for a penalty if they can establish that they took ‘all reasonable steps’ to ensure the company paid the liability, or alternatively that a voluntary administrator or small business restructuring practitioner was appointed, or that the company commenced a winding-up action.

The defence is also made out if the director can demonstrate that there were no reasonable steps that could have been taken to ensure that any of the above happened.

This defence will fail if the director relied on others to manage the company’s financial affairs (e.g. passive directors). Directors must demonstrate that they personally took all reasonable steps to satisfy this defence. Further, the inquiry into what is ‘reasonable’ for a director imports an objective test; the inquiry is not limited to the director’s personal knowledge of the options available. Rather, the inquiry extends to what a reasonable director in the director’s position would have known, had proper inquiries been made.

GST and superannuation guarantee defence

With respect only to GST or superannuation guarantee liabilities, the director will not be liable to a director penalty if they can establish that the company applied the relevant legislation in a way that was ‘reasonably arguable’, and also took ‘reasonable care’ doing so.

Broadly, a matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, ‘that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect’.⁴ Further, exercising ‘reasonable care’ means making a reasonable attempt to comply with the relevant law. For example, the defence would be relevant if the director had reasonably considered the company was not liable to pay superannuation guarantee on behalf of its contractor, as the contractor was not paid for personal labour (in the event that the ATO subsequently disagrees with this interpretation of the contract or services agreement).

How can Rigby Cooke Lawyers help?

If you are experiencing difficulty complying with your company’s tax obligations, it is critical that you undertake early engagement with the ATO and make appropriate arrangements, such as setting up a payment plan. Typically, the ATO will only issue DPNs as a measure of last resort.

If you receive a DPN, you must act immediately and seek legal advice. We have worked with many clients to make relevant defence submissions to the ATO and have successfully negotiated a remission of liabilities.
<sub>References
1. https://www.ato.gov.au/media-centre/deputy-commissioner-anna-longleys-speech-to-the-tax-institute-tax-summit
2. https://www.transparency.gov.au/publications/treasury/australian-taxation-office/australian-taxation-office-annual-report-2022-23/part-2—year-in-review/our-progress-in-2022%E2%80%9323
3. https://www.ato.gov.au/about-ato/managing-the-tax-and-super-system/corporate-plan/ato-corporate-plan-2025-26/1-australian-taxation-office/enterprise-priorities
4. Sec.284-15(1), Sch 1 to the Taxation Administration Act 1953 (Cth).</sub>