What is a director penalty notice (DPN)?

A director penalty lets the ATO recover certain unpaid company debts from the company’s directors personally. A director penalty notice (DPN) is the notice the ATO must give you before it can start recovering that penalty from you.

What a director penalty is

The ATO says that if your company doesn’t pay certain liabilities by the due date, it can recover these amounts from you personally as a current or former company director.

Which debts it covers

The ATO lists three types of unpaid company amounts:

• Pay as you go (PAYG) withholding, such as the tax you withhold from your employees’ wages
• Goods and services tax (GST), which the ATO says includes luxury car tax (LCT) and wine equalisation tax (WET)
• Super guarantee charge (SGC), which applies when super isn’t paid correctly and on time

A parallel liability

The ATO describes a director penalty as a “parallel liability”. Your personal liability mirrors the company’s. Any payment made towards either the company’s debt or your penalty reduces both by the same amount.

If the company has more than one director, the ATO says each director is likely to owe the same amount. It may recover the amount equally from all directors or take each director’s circumstances into account.

What a DPN is

The ATO describes a DPN as a notice it must give you first before it can take action to recover director penalties. The notice sets out the unpaid amounts you are liable for and the remission options available to you.

How it is sent

For a current director, the ATO says it will generally send the DPN to your address registered with the Australian Securities and Investments Commission (ASIC). If there is no address registered with ASIC, it uses the address it last has for you.

When the clock starts

The ATO says the 21 days starts on the day it posts the DPN or leaves it at the address registered with ASIC. The time can start running before you open the letter. If your ASIC address is out of date, you could lose most of the 21 days before you know about the notice.

The 21-day time frame

Within 21 days of the notice, the penalty can be remitted (cancelled) if the company does one of the following:

• pays the amount outstanding in full
• appoints an administrator
• appoints a small business restructuring practitioner
• begins to be wound up

Which of these options you have depends on whether the company reported the amounts on time (see below). The ATO says that if the penalty is not remitted within 21 days of the notice, it may take action against you to recover the director penalty amounts.

Standard and lockdown DPNs

People often talk about “standard” (or “non-lockdown”) DPNs and “lockdown” DPNs. The ATO doesn’t use these labels, but its rules create the same two outcomes. The difference is whether the company reported the debt on time.

Debt	Reported on time	Reported late or never reported
PAYG withholding and GST	Reported within 3 months of the due date: any of the 4 options above can remit the penalty	Reported more than 3 months after the due date, or not reported: only paying in full remits the penalty
Super guarantee charge	Reported by the SGC due date: any of the 4 options above can remit the penalty	Reported after the SGC due date, or not reported: only paying in full remits the penalty

When only full payment will remit the penalty, it is commonly called a lockdown DPN. Appointing an administrator, a small business restructuring practitioner or a liquidator will not remit the penalty in that case.

When the ATO estimates what you owe

If a company doesn’t report its PAYG withholding, GST or SGC by the due date, the ATO says it may make a reasonable estimate of the unpaid amounts. Director penalties can apply to these estimates. The ATO treats estimated amounts as amounts that were never reported, so only full payment will remit the penalty.

How it becomes personal liability

Once a director penalty applies to you and the 21 days pass without it being remitted, the ATO can pursue you, not only the company. The ATO lists these ways it may recover the amount:

• offsetting any of your tax refunds or credits against the director penalty
• issuing a garnishee notice, which requires a third party who holds money for you, such as your bank, to pay it to the ATO
• starting legal proceedings to recover the debt

New directors

The ATO says you will not be liable for a director penalty that was due before your appointment if, within 30 days of your appointment, you ensure the company pays the amount in full, appoints an administrator, appoints a small business restructuring practitioner or is wound up.

Former directors

The ATO says former directors remain liable for amounts that were due before they resigned. They can also be liable for amounts that became due after they resigned but relate to a period when they were still a director. Resigning does not remove the obligation, and the ATO says you remain liable after the company is deregistered.

Defences

The ATO describes three defences. You are not liable if, throughout the relevant period:

1. you didn’t take part in managing the company because of illness or another acceptable reason, and it would have been unreasonable to expect you to take part, or
2. you took all reasonable steps to ensure the company paid the amount, appointed an administrator, appointed a small business restructuring practitioner or began winding up, or
3. for SGC or GST only, the company applied the law in a way that could reasonably be argued was correct, and took reasonable care.

The ATO says relying on others, including fellow directors and professional advisers, is not a defence. A defence must be put to the ATO in writing and must say which of the three defences you rely on. If you think you have a valid defence, the ATO asks you to contact it as soon as possible.

Step by step

These steps help you understand where you stand as a director. They are not a substitute for advice about your situation.

1. Check your ASIC address. Make sure the address ASIC holds for you is current, because that is where a DPN will generally be sent.
2. Check what the company has reported. Ask your bookkeeper, accountant or registered tax agent whether all BAS and super obligations have been reported, and when.
3. Watch the 3-month and SGC due date points. Reporting on time keeps more remission options open if a DPN is ever issued.
4. Keep an eye on the company’s ATO account. Unpaid PAYG withholding, GST and super are the debts that can become your personal liability.
5. Act fast if a DPN arrives. Our guide on what to do if you receive a DPN sets out the first steps.

Important things to know

• The 21 days runs from posting, not from when you read it. Open ATO mail promptly and keep your ASIC address up to date.
• Lodging on time protects your options. Even if the company can’t pay, reporting PAYG withholding and GST within 3 months of the due date, and SGC by its due date, keeps the insolvency options open. See overdue BAS and unpaid super guarantee.
• Insolvency options are serious decisions. Appointing an administrator, a small business restructuring practitioner or a liquidator are formal insolvency steps with major consequences for the company. ASIC says only a registered liquidator can act as a restructuring practitioner, and that the company’s total liabilities must not exceed $1 million to use small business restructuring. Talk to a registered liquidator and a lawyer before you decide.
• Every director can be pursued. The penalty applies to each director, so talk to your fellow directors early.
• A DPN is part of wider ATO debt recovery. See what happens if you can’t pay the ATO for the other steps the ATO may take.