Director Penalty Notices Explained, Lockdown DPNs, SBRs and Personal Liability

Part of the Tax Assure Advisor Insights series, where our team sits down with specialists from across the wider business advisory space to talk through what’s actually happening for directors and the businesses we work with.

We’re seeing more Director Penalty Notices arrive on directors’ desks than we were a year ago. Most have one thing in common. The director only half-understands what they’re holding.

The mechanics matter. What the notice actually does, how it interacts with the company debt, and where insolvency does and doesn’t help are the parts directors most often get wrong, and the parts that change the answer.

This article is part of our Advisor Insights series, where Tax Assure sits down with specialists across the wider business advisory space to talk through what’s actually happening for directors and the businesses we work with. In this piece, our CEO Olga Koskie is joined by Liam Bailey, registered liquidator, trustee in bankruptcy, and managing partner at O’Brien Palmer. The full discussion is available to watch below, along with the rest of the series on the Tax Assure YouTube channel.

Key takeaways

• • A Director Penalty Notice makes a director personally liable for the company’s unpaid GST, PAYG withholding and superannuation guarantee.

• • Lockdown DPNs are automatic. The personal liability exists once reporting is three months past due, whether or not the notice has been received.

• • The company debt and the DPN debt sit in parallel. A company payment plan reduces both balances at the same time.

• • A Small Business Restructure resolves company debt only. It does not extinguish a director’s personal DPN liability.

• • Interest and penalties can be remitted in some circumstances, but the ATO treats them as part of the debt and pursues them like any other balance.

• • The 21-day window is short, but acting late is almost always better than not acting at all.

How a Director Penalty Notice works

A Director Penalty Notice is the ATO’s mechanism for moving company tax debt onto the director personally. It covers three categories of debt, GST, PAYG withholding, and the superannuation guarantee, and gives the director 21 days to do something about it.

“They issue these notices that say you’ve got 21 days to come to some sort of solution to the problem. Otherwise we’re going to add this liability to your personal tax account.” — Liam Bailey

The 21-day options are paying the debt, entering a formal payment arrangement, or making a formal insolvency appointment. The notice exists to force a conversation, not to end one.

Lockdown vs non-lockdown Director Penalty Notices

The DPN you’d want to receive is a non-lockdown notice. It still creates personal exposure, but you have options to discharge the liability inside the 21-day window.

A lockdown DPN is a different animal. You’re automatically liable for the company’s debts because the company has failed to report to the tax office in the ordinary fashion for more than three months past the due date.

That’s the part directors most commonly miss. Once the three-month reporting window has lapsed, the personal liability already exists. The notice in the mail is the ATO telling you about it, not creating it.

“Technically a director is personally liable under the director penalty notice legislation automatically, even if they haven’t yet received the notice.” — Liam Bailey

The volume of lockdown DPNs we’re seeing now reflects how seriously the ATO takes on-time reporting. Late lodgement is often the issue under the issue.

Parallel liability and why it matters

When a DPN is issued, the company debt and the director’s personal debt sit alongside each other. The same dollar figure appears on both ATO portals.

If the company has a $300,000 debt that turns into a DPN debt, both the director and the company carry that same $300,000 on their ATO portals. When the company enters a payment plan and starts paying that down, the debt reduces on the director’s personal account at the same time.

A viable company put into a structured payment plan addresses both balances at once, and it stops enforcement of the DPN while the plan is being paid. For directors whose businesses are still trading profitably and just need breathing space, this is usually the cleanest path.

How a Small Business Restructure interacts with a DPN

Small Business Restructures have become a real option for companies with tax debt since 2020. The ATO will listen to a proposal that puts the business back into the black, particularly where the alternative is liquidation and a zero return to creditors.

What an SBR will not do is resolve the director’s personal liability under a DPN. This is the trap.

The maths makes it clear. If you have a $500,000 tax debt, the SBR might successfully secure a deal where 25 cents in the dollar is paid on the company debt. That resolves the company’s liability. If the director had $300,000 of lockdown DPN liability sitting behind it, that personal debt still exists after the SBR completes.

“You’re still going to have to find a way to sort out that parallel liability with the ATO.” — Liam Bailey

We’ve seen this play out in cases where the SBR was sold as the answer and the director was left holding personal liability the restructure couldn’t touch. Two further reasons SBRs get knocked back at the moment, director loans and Division 7A loans on the books. The ATO has tightened its view on what a responsible SBR proposal looks like, and unresolved director loans are a common reason for refusal.

The job before any SBR conversation is mapping what’s company and what’s already personal. Sometimes the answer is an SBR for the company plus a separate payment plan for the director’s DPN balance. Sometimes the personal liability is large enough that a payment plan on its own is the better option, because the SBR won’t move the dial on the part that matters most.

Interest, penalties and remission

The ATO does not treat General Interest Charge as a softer category of debt. It pursues interest and penalties the same way it pursues the primary balance.

One example. A client had cleared the principal of their ATO debt and was left with around $100,000 in interest only. Their accountant had lodged a remission application. While that application was being considered, the ATO issued a garnishee for $70,000 against the company’s bank account. Interest-only debt, fully recoverable.

Remission of GIC is possible, but it requires more than the request. The ATO needs to see compliance, with lodgements up to date, a payment plan in place, ongoing liabilities being met, and circumstances outside the director’s control for the period the debt accrued. Natural disasters qualify. COVID alone, on most current applications, no longer does.

GIC is also no longer tax-deductible as of recent legislative changes. The ATO is no longer in the business of interest-free SME funding.

The 21-day clock and why “too late” is almost never true

When a DPN arrives, the 21-day clock runs from the date on the notice, not the date it landed in the letterbox. Arguing about postal dates is settled law and not a productive use of the window.

What is productive is picking up the phone. There are recent cases where a director found a DPN after returning from leave with one day left on the clock, and a formal Small Business Restructure appointment was implemented within 24 hours. Enough to stop the debt crystallising personally.

“Pick up the phone to look at the solutions. A payment plan will stop further action. There are insolvency solutions. If you ignore it because it’s a bit scary and you don’t do anything, it will get worse.” — Olga Koskie

Where Director Penalty Notices sit in ATO enforcement

DPNs are one of four enforcement actions the ATO uses against business tax debt. The others are credit reporting to commercial credit bureaus, garnishee notices on bank accounts and debtors, and winding-up proceedings in the Federal Court.

These actions are deployed in combination, not isolation. A director sitting on an unactioned DPN should assume the company’s debt has also been flagged for credit reporting and is being assessed for garnishee action. The 21 days isn’t just about the DPN. It’s the window the ATO is giving you to engage before the rest of the toolkit comes out.

Watch the full discussion

Olga and Liam talk through DPNs, SBRs, lockdown notices and parallel liability in more detail in the conversation below.