tl;dr: A Director Penalty Notice (DPN) is a legal notice issued by the ATO that makes company directors personally liable for unpaid Pay As You Go (PAYG) withholding, Goods and Services Tax (GST) and Super Guarantee Charge (SGC). Once a DPN is issued, directors have 21 days to pay the debt or take action such as appointing an administrator. Failure to act can lead to garnishee notices or legal recovery. Understanding how DPNs work is critical for directors of SMEs who may be exposed to tax debts.
What is a Director Penalty?
The Australian Taxation Office uses the director penalty regime to enforce tax compliance. When a company fails to pay certain liabilities by the due date, the ATO can recover those amounts from current or former directors. Liabilities covered include:
- Pay As You Go (PAYG) withholding;
- Goods and Services Tax (GST);
- Super Guarantee Charge (SGC).
These unpaid amounts are called director penalties. The liability arises automatically once the company misses a payment deadline. A DPN is the formal notice that allows the ATO to recover the penalty from directors.
Types of Director Penalty Notices
There are two types of DPNs:
- Non‑Lockdown DPN: Issued when the company lodges its BAS and SGC statements on time but fails to pay the debt. Directors have 21 days from the date the notice is issued to do one of the following:
– Pay the debt in full;
– Appoint an administrator;
– Appoint a small business restructuring practitioner;
– Begin to wind up the company.
- Lockdown DPN: Issued when the company fails to lodge BAS or SGC statements within three months of the due date. In this case the penalty can only be remitted by paying the debt in full. Directors cannot avoid personal liability by putting the company into administration or liquidation.
What to do if you receive a DPN
- Act quickly: The 21‑day deadline includes weekends and public holidays. If you do nothing, the ATO can commence recovery action against you personally.
- Seek professional advice: Insolvency practitioners and tax advisers can assess your options, including negotiating with the ATO.
- Pay or enter administration: If the company can pay, do so immediately. Otherwise, appoint an administrator or restructuring practitioner within 21 days.
- Avoid repeat offences: Lodging BAS and SGC statements on time is crucial. Late lodgement for more than three months results in a lockdown DPN with no escape other than paying the debt.
Consequences of ignoring a DPN
Ignoring a DPN can lead to:
- Garnishee notices: The ATO can require banks or debtors to pay funds directly to the ATO.
- Offsetting tax credits: Any personal tax refunds may be applied against the director penalty.
- Legal proceedings: The ATO can sue directors to recover the penalty.
- Bankruptcy: Directors who cannot pay may face bankruptcy proceedings.
Preventing a DPN
- Lodge and pay on time: Ensure BAS, GST and super obligations are reported and paid on time.
- Keep records: Maintain accurate accounting records and reconciliation of payroll, GST and PAYG withholding.
- Monitor tax portals: Directors should have access to the ATO’s online services to monitor outstanding liabilities.
- Set aside tax funds: Separating tax and super from operating funds helps ensure obligations are paid.
FAQs
Can former directors be liable? Yes. Directors who resign can still be liable for unpaid liabilities that arose before they left office.
Are DPNs issued for every unpaid tax debt? No. They are issued for unpaid PAYG withholding, net GST and super guarantee charge.
Is there a defence to a DPN? Directors may raise defences if they took all reasonable steps to pay the debt or if illness prevented them from managing the company. However, these defences are limited.
Definitions
- Pay As You Go (PAYG) withholding: Tax withheld from employees’ wages and remitted to the ATO.
- Goods and Services Tax (GST): A 10 % consumption tax on most goods and services in Australia.
- Super Guarantee Charge (SGC): Penalty for failing to pay super contributions on time; includes interest and administration fees.
External links
- [ATO – Director penalty regime] – official guidance on DPNs.
- [ATO – Remission of director penalty] – rules for remission and examples.
- GPS Finance – ATO Debt and Lending Guide – our article on finance options with tax debt.
Avoid personal liability from director penalties—speak with GPS Finance Group about payment strategies or partner with us to educate your clients.