Understanding Director Penalty Notices (DPN) – by Chad Gear and Greg Grunert

Insolvency Series:

Businesses in Australia face an increasingly complex economic landscape characterised by high interest rates, escalating enforcement action from the Australian Taxation Office (ATO), and market volatility. These factors, among others, have contributed to a 35% increase in formal insolvency appointments during the period July 2023 to November 2023. [1]

The ATO’s reactivation of collection processes, which were temporarily paused during the COVID-19 pandemic, has been a significant contributing factor to the recent increase in insolvency appointments. The ATO’s resurgent collection activities have shifted from the traditional approach of collection through the Court-appointed winding up, to focusing on pursuing company directors directly via Director Penalty Notices (DPNs). 

With the ATO’s collectable tax debts increasing to $50.2bn in 2023 [2], ATO’s debt collection, and in particular DPN activity, are on the rise. With this increase comes an increasing need for company directors to understand how a DPN operates, and to be aware of their options when receiving a DPN.

What is a Director Penalty Notice (DPN)? 

DPNs are a debt collection tool used by the ATO to notify a director that the ATO intends to recover company tax debts from them personally. A DPN can make a director personally liable for the following types of tax debts:

• Pay As You Go withholding (PAYGW);
• Goods and Services Tax (GST); and
• Superannuation Guarantee Charge (SGC).

The DPN itself does not impose personal liability on a director, but it is a requirement under the Taxation Administration Act 1953 (TAA) before the penalty can be imposed and the ATO can commence proceedings to recover the penalty.

How to respond to a DPN? 

The options available to a director when faced with a DPN will depend on whether the director receives: 

• a “standard DPN”; or 
• a “lockdown DPN”. 

Standard DPNs 

Most commonly, directors will receive a standard DPN from the ATO. In this case, there are several options available to a director that permit a director to avoid personal liability under the DPN for company taxes. The director must adopt one of the following options within 21 days.

• if the company meets certain threshold requirements, appoint a small business restructuring practitioner. This type of appointment allows directors to continue trading the business while undergoing small business restructuring.
• appoint a voluntary administrator to the company. This type of appointment can provide a business with breathing room and may result in the restructuring or sale of the business.
• appoint a liquidator to the company. This type of appointment is a last resort and should be approached with caution given it has wide-reaching impacts on creditors, employees and directors. However, in some cases, it is in the interests of all involved for a company to be wound up. 

Lockdown DPNs

The ATO may also issue what is refferred to as a “lockdown DPN” if three months have lapsed after the due date for lodgement, and the company’s liability remains unpaid and unreported. If a director receives a “lockdown DPN”, there are limited options to avoid liability including: 

• have the company pay the relevant debts;
• personally pay the debts;
• personally negotiate with the ATO for a payment arrangement (although it is a common misconception that entering a payment arrangement allows a director to avoid personal liability); 
• enter into a formal personal insolvency arrangement, including a debt agreement, the appointment of a controlling trustee and proposing a Part X agreement, or bankruptcy.

It is crucial that directors are proactive in consulting their professional advisors including company accountants, particularly during times of financial stress. Staying up-to-date with your company’s tax obligations will prevent the likelihood of receiving a director penalty notice. 

Is there a DPN defence?

There are several statutory defences available to directors although they will depend on your personal circumstances. These include:

• if the director was unable to manage the company due to serious illness or another incapacitating condition;
• if the director acted in good faith based on professional advice received regarding the company’s tax liabilities;
• if the director was not involved during the period when tax liabilities were incurred.

We recommend that you speak to a professional lawyer to discuss the most applicable defence case for your situation.

What to do if you receive a DPN

If you receive a DPN, we recommend that you immediately seek professional advice specific to your circumstances. DPNs can be a source of significant stress for directors. However, the key takeaway for directors is to take proactive and immediate action. 

What happens if a DPN is ignored?

The worst thing a director can do is ignore a DPN. Ignoring a Director Penalty Notice can lead to insolvency for the company and negatively affect the director’s personal financial status and credit rating. In cases where a DPN is ignored, the director will be held personally liable for the company’s tax debt and may receive a garnishee notice from the ATO.

Contact Gear & Co Lawyers Regarding Company Tax or Insolvency

Gear & Co Lawyers has experience assisting directors with the entire range of insolvency and bankruptcy-related issues, including dealing with director penalty notices or DPNs. If you or someone you know receives a DPN or is faced with a company tax or insolvency matter, contact Chad Gear or Greg Grunert on (07) 3209 2547, or at info@gearandco.com.

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While attempts have been made to ensure the currency of information contained in this publication, it is not guaranteed.  This publication is intended to provide only general information on matters of interest.  It is not intended to be comprehensive and does not constitute and must not be relied upon as legal advice.  You should seek legal or other professional advice which is specific to your circumstances.