Director Penalty Notice – #1 Complete Guide for Directors

A director penalty notice is a notice from the Australian Taxation Office (“the ATO”) directed at a director (or directors) of a company making the director(s) personally liable for tax debts.

The director penalty notice (“DPN”) is issued by the ATO when the company has failed, neglected, or refused to pay and/or report tax obligations, significant unpaid debt; and/or the suspicion of phoenix activity.

Once given, the director penalty notice will either:

1. Make you immediately personally liable (lockdown notice); or
2. Give you 21 days to satisfy the requirements, or then become personally liable.

To satisfy the requirements and avoid personal liability, the company must:

1. Pay the tax debt; or
2. Put the company into administration and/or liquidation; or
3. Appoint or a small business restructuring practitioner; or
4. Prove a defence to the director penalty notice.

In this article, our tax debt lawyers will attempt to provide a complete guide to director penalty notices, the rights, and obligations of directors, and possible defences.

If you have received a director penalty notice, and you need any advice or assistance, then contact our litigation lawyers today.

What Is a Director Penalty Notice?

A director penalty notice is a notice from the the ATO to a director of a company, making the director personally liable for tax debts.

The ATO will send a director penalty notice to a director of a company that has defaulted on its taxation obligations.

The ATO may issue a director penalty notice if the taxpayer fails to meet their taxation obligation in relation to Pay As You Go, Superannuation Guarantee Charge, and Goods & Services Tax.

Types of Director Penalty Notices

There are two (2) types of director penalty notices depending on the type of tax debt.

These types of director penalty notices are:

1. A traditional director penalty notice (21 days); and
2. A lockdown director penalty notice (immediate).

We will explain both of these DPN’s below.

What is a 21-Day Director Penalty Notice?

A 21-day DPN or traditional DPN is a notice requiring the company to do what is required within 21-days, or the director faces personal liability.

This essentially pierces the corporate veil and makes the director personally liable for the tax debts of the company.

A traditional or 21-day director penalty notice is given by the ATO when a company’s tax liabilities are not paid but have been reported to the ATO within three (3) months of the due date.

Pursuant to Division 269-15 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (“the TAA”), a traditional or 21-day director penalty notice gives the director of the company 21 days to do any of the following:

1. the company complies with its obligation; or
2. an administrator of the company is appointed under section 436A, 436B or 436C of the Corporations Act 2001; or
3. a small business restructuring practitioner for the company is appointed under section 453B of that Act; or
4. the company begins to be wound up (within the meaning of that Act).

This basically means, (1) pay (or enter into an agreement to pay); (2) put the company into administration or liquidation; or (3) engage a small business restructuring practitioner.

If any of these three (3) things are not done within the required time, then the director becomes personally liable for the amount of tax the ATO says is outstanding.

It is very important to contact a tax dispute lawyer or insolvency practitioner as soon as possible after receiving a director penalty notice.

When does the 21-day Period Commence?

The clock starts ticking on the 21-days from the date of the DPN Notice, likely being the date on which the ATO posts it or leaves it.

Division 269-25(1) of Schedule 1 of the the TAA says:

The Commissioner must not commence proceedings to recover from you a penalty payable under this Subdivision until the end of 21 days after the Commissioner gives you a written notice under this section. [my emphasis]

This means that the 21-days start from when the ATO gives the taxpayer the written notice. But what does “gives” mean in this context?

Division 269-25(4) of Schedule 1 of the TAA then goes on to say:

(4)  Despite section 29 of the Acts Interpretation Act 1901, a notice under subsection (1) is taken to be given at the time the Commissioner leaves or posts it. [my emphasis]

Therefore, the 21-day countdown starts from the date of the director penalty notice, the date that the ATO sends it, and not the date that it is received by the director.

It is very important to contact a tax dispute lawyer or insolvency practitioner as soon as possible after receiving a director penalty notice.

How is a Director Penalty Notice Given?

A director penalty notice is given by leaving it at, posting it to, the address held on the ASIC current extract for the residence of place of business.

Division 269-50 of Schedule 1 of the TAA says:

The Commissioner may give you a notice under section 269-25 by leaving it at, or posting it to, an address that appears, from information held by * ASIC, to be, or to have been within the last 7 days, your place of residence or * business.

It is very important that you keep your company records up to date with ASIC because a director will be deemed to have been given the notice if sent to an old address.

What is a “Lockdown” Director Penalty Notice?

A lockdown director penalty notice is given when a company’s tax liabilities are not paid and have not been reported to the ATO within three (3) months of the due date.

Pay the company debt in full within the 21-day period is the only way a director can avoid personal liability for a lockdown director penalty notice.

The reason for this is to ensure that directors cannot avoid liability for aged taxation debts by placing the company into administration and then liquidation.

In fact, although rare, the ATO can issue director penalty notices to directors even after the company has been placed into liquidation.

It is very important to contact a tax dispute lawyer or insolvency practitioner as soon as possible after receiving a director penalty notice.

Could I get both a Traditional Notice and a Lockdown Notice?

It is possible to get a traditional 21-day notice and a lockdown notice at the same time for different debts.

One director penalty notice for the tax liabilities of the company which are not paid but have been reported within three (3) months of the due date (traditional 21-day DPN).

One director penalty notice for the tax liabilities of the company which are not paid and have not been reported within three (3) months of the due date (lockdown DPN).

This (amongst other reasons) is why it is important to report and lodge your returns with the ATO.

Case Law in Relation to Effective Service

One of the main cases in relation to service of a director penalty notice is Deputy Commissioner of Taxation v Meredith [2007] NSWCA 354 in which they discussed:

1. When a notice was given; and
2. The presumption of delivery; and
3. Providing evidence of non-delivery or non-receipt.

In relation to when a director penalty notice was given when it was delivered, or when it was sent, the Court in Meredith found that it was upon delivery. This was subsequently overturned by the Appeal Court in Soong v Deputy Commissioner of Taxation [2011] NSWCA 26. However, both of these cases have simply been replaced by Division 269-25(4) of Schedule 1 of the TAA. It is clear now that notice is given to a director at the time the Commissioner leaves or posts it.

When is a DPN Deemed to be Given?

In Deputy Commissioner of Taxation v Lawson [2017] VSC 789 Croft J said:

The Defendant’s mere assertions as to not having received the Second DPN are not sufficient to displace the deeming effect of s 269-25(4). In any event, an assertion of non-receipt is not sufficient to establish the non-delivery of the Second DPN.

In Deputy Commissioner of Taxation v Paul Tannous [2016] NSWSC 1654 Hall J said:

Pursuant to s269-25 of the TAA53, and as extracted above, a notice is taken to be given at the time the Commissioner leaves or posts it. The section expressly excludes the presumption of delivery under s 26(1) of the Acts Interpretation Act.

Section 269-50 of the TAA53 stipulates that the Commissioner may give notice under s 269-25 by “leaving it at, or posting it to, an address that appears, from information held by ASIC, to be, or to have been within the last seven days, your place of residence or business”.

The effect of these two provisions is that the DCT does not need to satisfy the Court that a notice was actually received by the defendant. In order to satisfy the notice provisions of the TAA53 the DCT need only satisfy the Court that a stamped envelope with the penalty notice has been placed in a post box with the correct address.

So, to rebut the presumption that the director penalty notice was given to a director, the director will need to prove that:

1. The Commissioner did not leave it or post it.
2. If posted, the Commissioner did not pre-pay.
3. The Commissioner did not have the correct address held by ASIC.
4. The Commissioner did not use a valid business or residential address from the last seven (7) days.

As you can see, this is quite a difficult task.

What Are the Requirements for a Director Penalty Notice?

The notice must:

1. Be in writing.
2. Contain the amount of the tax liability.
3. State that a director must pay the penalty; and
4. Explain when the penalty will be remitted.

If the director penalty notice does not have all of these things, then an argument may be made that the notice is defective.

Division 269-25(2) and (3) of Schedule 1 of the TAA says:

(2)  The notice must:

(a)  set out what the Commissioner thinks is the unpaid amount of the company’s liability under its obligation; and

(b)  state that you are liable to pay to the Commissioner, by way of penalty, an amount equal to that unpaid amount because of an obligation you have or had under this Division; and

(c)  explain the main circumstances in which the penalty will be remitted.

(3)  To avoid doubt, a single notice may relate to 2 or more penalties, but must comply with subsection (2) in relation to each of them.

Who Can Be Issued with a Director Penalty Notice?

All current directors of the company will be issued with a director penalty notice.

In some circumstances, if a previous director was a director when the company incurred the obligation to pay the tax debt, then a previous director can be issued with a director penalty notice.

New directors must wait 30 days after becoming a director before they can be issued with a penalty notice, if they became a director after the due date.

When will the ATO Issue Director Penalty Notices?

The ATO have basically stated that any taxpayer who are simply not working to try to resolve their tax liabilities, and/or who are not working with the ATO to resolve their tax liabilities – may be given a director penalty notice.

The ATO has stated its stronger action policy, that it is targeting companies that:

Are unwilling to work with the ATO

Repeatedly default on agreed payment plans

Don’t have the capacity to pay and don’t take steps to resolve their situation

Have been subject to an audit where we detect deliberate avoidance and payment avoidance continues

Appear to be engaging in phoenix activities (using liquidation to avoid financial obligations without risking assets and with the intention of resuming business operations through a new entity).

However, the issuance of director penalty notices is at the discretion of the ATO.

Why would you receive a Director Penalty Notice?

As outlined above, a director of a taxpayer company will usually receive a director penalty notice if the company has:

1. A history of non-reporting to the ATO.
2. A history of refusing to work with the ATO to resolve this tax debt.
3. Large ATO tax debts which remains unpaid; and/or
4. The ATO suspects the company of phoenix activity.

What is Phoenix Activity?

According to ASIC, illegal phoenix activity occurs when a company (the old company) transfers the business and business assets into a new company, for little or no legal consideration (money), leaving the old company with all the debts.

The old company then is abandoned or goes into liquidation, usually owing money creditors and employee entitlements.

Some of the warning signs that a company is engaged in illegal phoenix activity includes:

1. The old company changes its name to the ACN
2. A new company is registered, usually with a similar sounding name.
3. The old company goes into liquidation and cannot pay its outstanding debts.
4. The directors transfer assets from the old company to the new company for no consideration or for consideration less than the current market value.
5. The new company simply trades as if it were the old company.
6. The directors of the old company are in control of the new company.

Find out more from the ASIC website here.

How to Avoid being Personally Liable for Company Tax Debts

It is really no secret to avoiding personal liability for company tax debts.

To ensure that a director does not receive a lockdown DPN, simply get your company tax returns ready and lodge them with the ATO.

If you get a 21-Day director penalty notice, then get advice as soon as possible within the 21-day timeframe.

Do not engage in illegal phoenix activity.

Options for Directors after Receiving a 21-Day Director Penalty Notice

There are five (5) options if a director is given a director penalty notice.

These options are:

1. Pay the amount of the debt in full.
2. Enter into an instalment agreement to pay the tax debt.
3. Appoint a liquidator to wind up the company in insolvency.
4. Appoint an administrator to the company; or
5. Attempt to defend the DPN.

If one of the director’s pays, then that director may have a right of indemnity and contribution from the company and/or from the other non-paying directors.

Pay the Amount of the Tax Debt in Full

Initially, the director (or directors) of the company can pay the amount of the tax debt.

If the company has borrowing capacity, or can quickly sell some assets, or borrow against those assets, then the company can simply pay its debts.

Obviously, this could be a substantial sum of money, so the company may not be able to find the funds to pay the tax debts.

If the director (or directors) of the company decide to pay the tax debts, then the director has rights of indemnity, subrogation, contribution from the company, and any non-paying directors.

Directors’ Rights of Indemnity and Contribution

If the director pays the tax debt that the ATO alleges is payable in the director penalty notice, then that director has rights of indemnity, subrogation, contribution or otherwise against the company, or against all other directors.

Division 269-45 of Schedule 1 of the TAA says:

(1)  This section applies if you pay a penalty under this Division in relation to a liability of the company under an obligation referred to in section 269-10.

(2)  You have the same rights (whether by way of indemnity, subrogation, contribution or otherwise) against the company or anyone else as if:

(a)  you made the payment under a guarantee of the liability of the company; and

(b)  under the guarantee you and every other person who has paid, or from whom the Commissioner is entitled to recover, a penalty under this Division in relation to the company’s obligation were jointly and severally liable as guarantors.

If the director cannot or will not pay the company tax debt, then the director may also choose to appoint an administrator and/or a liquidator.

Appoint a Liquidator to wind up the Company in Insolvency

If the company and/or the directors are unable to pay their tax debts, then the directors can resolve to wind the company up in liquidation.

Section 513B of the Corporations Act 2001 (Cth) allows the company to resolve by special resolution that the company be wound up voluntarily.

If the company appoints a liquidator, then there are serious consequences for the company and the director and so it is vital that you seek urgent advice in relation to the risks and liabilities.

Contact us for a referral to a liquidator.

However, if done within the 21-days of a traditional director penalty notice, then this will stop any personal liability to arise from that DPN.

The company can also resolve to appoint an administrator.

Appoint an Administrator to the Company

A company can avoid liquidation, and a director can avoid personal liability under a DPN, by resolving that the company enter voluntary administration.

Section 436A of the Corporations Act 2001 (Cth) allows the company to appoint an administrator if the board has resolved to the effect that:

1. in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and
2. an administrator of the company should be appointed.

There are several reasons why an administration may be preferable to a liquidation.

The main reason is that the administrator will attempt to negotiate with the company’s creditors (including the ATO) to compromise the debts and seek consent to enter a deed of company arrangement (“DOCA”).

The administration may result in the company continue trading past its temporary insolvency or illiquidity. However, in practice more than 75% of administrations result in the company being placed into liquidation.

If the company appoints an administrator, then there may serious consequences for the company and the directors and so it is vital that you seek urgent advice in relation to the risks and liabilities.

Contact us for a referral to an administrator.

However, if done within the 21-days of a traditional director penalty notice, then this will stop any personal liability to arise from that DPN.

Enter into an Instalment Agreement to Pay the Tax Debt

If a director has been issued with a 21-day traditional director penalty notice, then another option is negotiating with the ATO to enter into an instalment repayment agreement.

Division 255-15 of Schedule 1 of the TAA says:

(1) The Commissioner may, having regard to the circumstances of your particular case, permit you to pay an amount of a * tax-related liability by instalments under an * arrangement between you and the Commissioner (whether or not the liability has already arisen).

(2) The * arrangement does not vary the time at which the amount is due and payable.

Note: Despite an arrangement under this section, any general interest charge or other relevant penalty, if applicable for any unpaid amount of the liability, begins to accrue when the liability is due and payable under the relevant taxation law, or at that time as varied under section 255- 10 or 255-20.

They may do this if you can provide evidence that you can pay, and it is on terms that the ATO is satisfied with.

The ATO Practice Statement Law Administration – PS LA 2011/14 outlines the requirements for an acceptable repayment plan, and includes:

1. Application process
2. Advice to taxpayer
3. Factors to be taken into account
4. Risk analysis
5. Commissioner’s discretion to offset
6. Terms and conditions of arrangement
7. Termination of arrangement

The director / company may also be required to provide security to secure this tax debt.

The types of preferred securities include:

1. a registered first mortgage from the taxpayer or a third party, over freehold property.
2. a registered second or subsequent mortgage from the taxpayer or a third party, over freehold property where there is sufficient equity in the property to secure the tax debt whilst ceding priority to the first or prior mortgagees
3. an unconditional bank guarantee from an Australian bank acceptable to the Commissioner (unconditional means the bank pays the Commissioner upon demand).

However, this must be done well in advance of the expiry of the 21-day time period, and in practice may be very difficult to finalise.

Upon entering the payment plan, the DPN should be officially withdrawn in writing.

Risk to Directors – Insolvency

As per division 255-15(2) above, the arrangement does not vary the time at which the amount is due and payable. The payment arrangement is due and payable unless it has been formally deferred.

Section 95A of the Corporations Act says:

(1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent.

In Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5, the Full Court of the Federal Court said (in obiter) at [515]:

The description of debts as “due and payable” is used widely in the TA Act in the context of when a liability to pay tax accrues and when payment of that liability is due. We agree with the primary judge that the term “due and payable” is well known. Section 95A of the Corporations Act provides that “A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable” … Section 255‑15 clearly informs the question of when a liability is due and payable where there is a payment arrangement, just as s 255‑10 informs the question of when a liability is due and payable where there has been a deferral granted by the Commissioner. There is nothing in that process that requires or suggests that “due and payable” in s 255‑15, or indeed Subdivision 255‑B of the TA Act, has any particular or confined meaning.

This was supported by Jahani (liquidator) v Alfabs Mining Equipment Pty Ltd, in the matter of Delta Coal Mining Pty Ltd (in liq) (No 3) [2021] FCA 1195

[t]he liquidators submit that the referee erred as a matter of law in not treating as due and payable taxation debts which were due but were subject to a payment arrangement. In that regard, the liquidators refer to Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5; 379 ALR 593 at [477]- [540], in particular [515] and [523]-[532] per Besanko, Markovic and Banks-Smith JJ. It is common ground that these passages are obiter (as explained at [208]-[209]). The liquidators point out that in Re Custom Bus Australia Pty Ltd (in liq) [2021] NSWSC 1036 at [39], Black J accepted that Clenergy at [498]ff supported the approach of treating the liability to the Deputy Commissioner of Taxation (DCT) as immediately due and payable, notwithstanding the existence of a payment arrangement, because there was no formal deferral of the tax debt.

RISK – So, one of the main risks of entering into a repayment plan, is that the director may still be liable for the debt to the liquidator, if the company was unable to pay its debts when they become due and payable, pursuant to section 95A of the Corporations Act 2001 (Cth).

Risk to Directors – Safe Harbour

Usually, safe harbour legislation allows a director to be free of personal liability if the director takes certain steps to create a better outcome for the company. 

A ‘better outcome’ is defined to mean an outcome which is better for the struggling company than the immediate appointment of a liquidator or an administrator of the company.

Section 588GA of the Corporations Act 2001 (Cth) outlines the requirements of the safe harbour provision.

However, in relation to director penalty notices, section 588GA(4)(a)(i) states:

(4) Subsection (1) [Safe Harbour] does not apply in relation to a person and either a debt or a disposition if:

(a) when the debt is incurred, or the disposition is made, the company is failing to do one or more of the following matters:

(i) pay the entitlements of its employees by the time they fall due.

Because the director penalty notice can be issued because of unpaid SGC (Superannuation Guarantee Charge), and this is an employee entitlement, then the safe harbour provisions may not apply.

RISK – another of the main risks of entering into a repayment plan, is that the director may be unable to use the safe harbour provisions in the Corporations Act, if the payment plan or DPN relates to any SGC or employee entitlements. 

TIP – prioritise payment of all of the entitlements of the company employees by the time they fell due, then enter into payment plans for the other company debts. 

There are also some defences to a director penalty notice.

If you have received a director penalty notice, and you need any advice or assistance, then contact our litigation lawyers today.

Defences after Receiving a Director Penalty Notice

Put succinctly, the two defences to personal liability from a director penalty notice are:

1. Illness
2. Reasonable steps

We will explore these in a lot more detail, with reference to case law, below.

The Defence of Illness

It is a defence to a DPN if because of illness (or other good reason) a director was unable to manage the company at the relevant times.

Division 269-35(1) of Schedule 1 of the TAA says:

(1)  You are not liable to a penalty under this Division if, because of illness or for some other good reason, it would have been unreasonable to expect you to take part, and you did not take part, in the management of the company at any time when:

(a)  you were a director of the company; and

(b)  the directors were under the relevant obligations under subsection 269-15(1).

For illness to be a valid defence, the illness must have led to the director not taking part in the management of the company at all relevant times.

The use of the word “reasonable” in the TAA posits an objective test rather than a subjective test.

The test for whether a reason for non-participation is “good” was stated in Deputy Commissioner of Taxation v Lesley Frances Robertson [2009] NSWSC 597 as:

The reason advanced must objectively be a good reason. For example, a total failure to participate for whatever reason should not be regarded as a ‘good reason’. In determining what may be a good reason for not participating in the management of a company, regard must be had to the high standards of care and skill now required of directors. The plaintiff submitted that a director who by a course of conduct is inattentive to the affairs of the company is unlikely to have the benefit of this defence. For example, it would not be sufficient if the director held a genuine view that he or she had good reason for not participating unless it were a ‘good reason’ when view objectively.

The director must be justified in non-participation in the management of the company.

In Snell v Deputy Commissioner of Taxation [2020] NSWCA 29, the Court said:

As a whole, the provision contemplates the circumstance that the director does not, and could not reasonably have been expected to, participate in management, because of illness or some other good reason. Essentially, this envisages a situation in which, though nominally remaining in office as a director, the relevant director does not participate in management because of illness or another good reason. In short, it involves justifiable non-participation in management, against the backdrop that it is the obligation of a director to participate in management of the company, and a director is not entitled to choose not to participate. It is unsurprising that, against that backdrop, the defence is not easily established. The defence means that a director who justifiably does not participate in management is not responsible for the Company’s default … Thus if, despite even serious illness, the director continues to participate in management, the defence is not available.

As you can see, the bar for what constitutes an objectively reasonable illness, or good reason is set very high.

The illness or good reason must be for the entire relevant time.

In Deputy Commissioner of Taxation v George [2002] NSWCA 336, the Court said:

It follows from this construction that a defence under s 222AOJ(2) [269-35(1)] was effective only if the director established a good reason for a failure to take part in the management of a company for the entirety of the period of the directorship during which the obligation under s 222AOB(1) existed.

In Deputy Commissioner of Taxation v Birt [2015] QDC 179, the Court said:

When considering whether the defences under s 222AOJ had been made out the relevant period was from the first deduction day to the end of the 14-day period specified in the notice …

This means that the illness (or other reason) must be the entire relevant time, a not simply a part of the relevant time.

The relevant time is from the first deduction day to the end of the 14-day period specified in the notice.

Another defence is that the director took all reasonable steps to ensure some prescribed things happened.

The Defence of Reasonable Steps

Division 269-35(2) of Schedule 1 of the TAA says:

(2)  You are not liable to a penalty under this Division if:

(a)  you took all reasonable steps to ensure that one of the following happened:

(i)  the directors caused the company to comply with its obligation;

(ii)  the directors caused an administrator of the company to be appointed under section 436A, 436B or 436C of the Corporations Act 2001 ;

(iia) the directors caused a small business restructuring practitioner for the company to be appointed under section 453B of that Act;

(iii)  the directors caused the company to begin to be wound up (within the meaning of that Act); or

(b)  there were no reasonable steps you could have taken to ensure that any of those things happened.

This essentially means that the director must show that they:

1. Tried to pay the tax debt.
2. Tried to put the company into administration.
3. Tried to a small business restructuring practitioner.
4. Tried to appoint a liquidator; or
5. There were no steps which could have been taken.

When making this defence, the case law seems to suggest that all of the above criteria be address, not simply one, or some.

In Roche -v- Deputy Commissioner of Taxation [2015] WASCA 196 the Court said:

The taking by the director of ‘all reasonable steps to ensure’, within s 269-35(2)(a), requires that each of the alternative events be addressed, either on the basis of taking reasonable steps to ensure the event happened or declining to do anything about that particular event on the basis that there were no reasonable steps that the director could have taken to ensure that the event happened.

In Canty v Deputy Commissioner of Taxation [2005] NSWCA 84, Handley JA said:

If reasonable steps taken in pursuit of one option fail, non-compliance and the obligation of the director or former director will continue. The director or former director will therefore have to take reasonable steps to achieve compliance in another way. If non-compliance continues long enough before a notice is served each of the four options will eventually have to be addressed and the subs (3) defences will have to cover all options.

Again, the use of the word “reasonable” posits an objective test, not a subjective test.

This means it is up to the Court to determine whether a reasonable director in the situation of the current director would have done the same things as the current director.

In Re a Solicitor [1945] 1 KB 368 the Court of Appeal, said:

The word “reasonable” has in law the prima facie meaning of reasonable in regard to those existing circumstances of which the actor, called on to act reasonably, knows or ought to know.

This means that the director’s obligation under this defence is not dependent on the director’s actual knowledge, as it is an obligation about which all directors ought to know.

The test to be applied was stated by Heydon JA (as he then was) in Deputy Commissioner of Taxation v Saunig [2002] NSWCA 390:

On its true construction, s 222AOJ(3) [269-35(2)] gives a defence to a defendant to proceedings for the recovery of a penalty imposed by s 222AOC [269-35(2)] if the defendant proves that he or she took all steps which were reasonable, having regard to the circumstances of which the defendant, acting reasonably, knew or ought to have known, to ensure that the directors complied with s 222AOB(1) [269-35(2)].

This is still the test and has been applied in recent cases.

So, what if there are no defences available and the director does not comply with the director penalty notice?

Consequences of Non-Compliance with a Director Penalty Notice

The consequences of non-compliance with a director penalty notice include:

1. The director being personally liable for the tax debt; and
2. The ATO commencing legal action against the director personally; and
3. When they get judgment, issuing a bankruptcy notice and commence bankruptcy; or
4. Issue a garnishee notice to the director.

All of these can have serious consequences for a director and a director’s personal assets. The liability are quite onerous for a director, which is why it is very important to contact a tax debt lawyer or insolvency practitioner as soon as possible after receiving a director penalty notice.

We have a detailed article of legal tax debt proceedings here.

How Does the ATO Recover Director Penalties?

There are three (3) main ways in which the ATO will seek to recover director penalties. These include:

1. Offsetting tax credits against the director penalties.
2. Issuing the taxpayer and/or the director with garnishee notices.
3. Commencing legal tax debt recovery proceedings against the director.

As you can see, the liabilities are quite onerous for a director, which is why it is very important to contact a tax debt lawyer or insolvency practitioner as soon as possible after receiving a director penalty notice.

What Information and Documents should you Send to a Lawyer?

If you want us to help you, or another tax debt lawyer, then you must prepare and give your tax lawyer copies of the following:

1. A copy of the director penalty notice.
2. All documents and/or receipts in relation to the alleged unpaid tax obligations.
3. All relevant company information and financial information.
4. All information in relation to the defences available (illness and/or reasonable steps.
5. All other relevant information requested by your lawyer.

Conclusion on Director Penalty Notices

If a director of a company is issued with a director penalty notice, it is very important to act very quickly.

The director can escape personal liability if it does what is required in the DPN.

There are also some defences available to directors, if they want to attempt to reason with the ATO.

However, the ATO are not completely unreasonable, and may still be prepared to settle the debt in the director penalty notice.

The main take away is to act quickly, as the clock starts ticking on the 21-day countdown as soon as the director penalty notice is posted, not the date it is received by the director.

If you have received a director penalty notice, and you need any advice or assistance, then contact our litigation lawyers today.

We get asked a lot of questions in relation to director penalty notices. We have outlined a few below.

What does the director penalty notice state?

The director penalty notice must be in writing; contain the amount of the tax liability; state that a director must pay the penalty; and explain when the penalty will be remitted.

How does a director avoid receiving a director penalty notice?

To avoid receiving a director penalty notice the company must get its tax returns ready and lodge them with the ATO; get advice as soon as possible; and do not engage in illegal phoenix activity.

When can the ATO issue a director penalty notice?

The ATO may issue a director penalty notice if the company is unwilling to work with the ATO; repeatedly default on agreed payment plans; do not have the capacity to pay and don’t take steps to resolve their situation; have been subject to an audit where we detect deliberate avoidance and payment avoidance continues; and/or it appears to be engaging in phoenix activities

Are directors personally liable for superannuation?

Yes. If a company fails to pay superannuation; and fails to lodge statements by the due date – the directors are personally liable for the unpaid superannuation and the ATO can issue a DPN.

Can directors be personally liable for tax?

Yes. A director can be personally liable for company tax debts in relation to unpaid PAYG, SGC, and GST.

What is a DPN notice?

A DPN notice is a director penalty notice. A director penalty notice is a notice to a director of a company making the director personally liable for company tax debts in relation to unpaid PAYG, SGC, and GST.

What are the two types of DPNs?

A traditional or 21-day DPN, and a lockdown DPN. A traditional DPN gives a director 21 days to do what is required. A lockdown DPN makes the director instantly liable.

Do you offer director penalty notice legal services?

Yes, we do. If you are the director of a company that owes the ATO a tax debt, then we can help you.

Contact us for an obligation and confidential chat about your options.

Are directors liable for unpaid superannuation?

Yes. The directors of the company are automatically liable personally if the company fails to lodge SGC statements and pay superannuation. If this is the case then the ATO will likely issue a lockdown director penalty notice to recover superannuation from the directors.

Even if the company goes into liquidation, this will not save the directors from personal liability.

Do I have to liquidate the company to avoid tax?

You should not liquidate a company simply to avoid paying tax. Obviously, if the company is genuinely insolvent, and the ATO are a creditor, then this may be one of the only options.

However, this does come with some risk to the directors personally, and should only be done after seeking professional advice.

Do you practice in director penalty notices law?

Yes we do. We can offer advice and assistance with all areas of director penalty notices law.

What is a Warning of Possible Director Penalty Notice?

A warning of possible director penalty notice (DPN) for an unpaid company debt is letter from the ATO to directors warning of the potential for personal liability for directors if the company does not PAYG, SGC, and GST.

Contact us for an obligation and confidential chat about your options.

If you have received a director penalty notice, and you need any advice or assistance, then contact our litigation lawyers today.