A Director Penalty Notice (DPN) is an enforcement notice issued by the Australian Taxation Office that can make directors personally liable for unpaid company tax debts, including PAYG and superannuation. Directors have 21 calendar days from the notice date to take action before the ATO may pursue the debt personally.
Pre-read: This guide is ideal for directors of Australian companies only.
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On This Page
- Intro
- What is a Director Penalty Notice (DPN)?
- Types of DPNs
- 21-Day Deadline
- How the ATO Recovers Debts
- DPN Outcomes
- How Company Directors Can Avoid DPNs
- Special Situations
- DPN Defence and Personal Liability
- FAQs
Introduction
Director Penalty Notices (DPNs) are one of the Australian Taxation Office’s (ATO) most serious enforcement tools for unpaid company tax obligations. The ATO issues DPNs to recover unpaid company taxes and enforce director liabilities under Australian law.
When a DPN is issued, the ATO may pursue company directors personally for certain tax debts owed by the company. This means that liabilities that originally belong to the business can become personal financial risks for directors. Director’s liability means directors can be held personally liable for company tax debts if obligations are not met.
This guide explains what DPNs are, how they arise, and what directors should understand about their potential consequences. Understanding how director penalties work can help business owners recognise the risks early and consider appropriate steps before matters escalate.
What is a Director Penalty Notice (DPN)?
A Director Penalty Notice is a formal notice issued by the ATO that makes a company director personally liable for certain unpaid company tax debts. Both current and former directors, including those who receive a DPN, can be held responsible depending on the circumstances.
The ATO can issue a DPN to both current and new directors for unpaid tax liabilities when companies fail to meet obligations relating to:
- PAYG withholding tax
- GST
- Superannuation guarantee obligations
Once issued, the director can become personally liable for the company’s unpaid tax debt. Directors have 21 calendar days from the date of the notice to take action.
DPN Triggers
DPNs are generally issued when a company fails to meet specific tax obligations owed to the ATO.
The most common DPN triggers involve:
- Unpaid PAYG withholding amounts
- Unpaid Superannuation Guarantee Charge (SGC)
- Goods and services tax (GST)
- Failure to lodge required tax reports with the ATO
It is crucial for directors to meet the due date for lodging BAS, IAS, and SGC statements, as missing these deadlines can trigger personal liability.
In many cases, the ATO will first attempt to recover outstanding debts through normal collection processes.
Also note, that the exact circumstances that lead to a DPN can vary depending on the company’s lodgement history and tax compliance.
To avoid receiving a Director Penalty Notice, directors should ensure timely lodgement of all required BAS, IAS, and SGC statements, even if payment cannot be made immediately.
Types of DPNs
There are two main types of Director Penalty Notices:
- Non-Lockdown DPN: This is issued when a company has lodged its business activity statements (BAS), instalment activity statements (IAS), or superannuation guarantee charge (SGC) statements within the required timeframes, but has not paid the associated PAYG withholding or SGC debts. Directors can avoid personal liability by paying the debt, appointing an administrator, or beginning the process of winding up the company within 21 days of the notice.
- Lockdown DPN: This is issued when a company fails to lodge its BAS, IAS, or SGC statements within the required timeframes. In this case, directors become automatically and permanently liable for the unpaid amounts, and their options for avoiding personal liability are significantly limited.
When dealing with either type of DPN, it is crucial for directors to understand the company’s liabilities and assess the company’s financial position. This helps in determining the best course of action to address outstanding debts and protect the company’s financial health.
Non-Lockdown DPN
A Non-Lockdown DPN usually arises when a company has lodged its tax reports on time, but the underlying tax debt remains unpaid.
In these cases, directors may still have options available during the 21-day response period that can lead to the penalty being remitted.
Possible actions may include:
- Paying the outstanding debt
- Setting up a payment plan with the ATO
- Placing the company into voluntary administration
- Entering liquidation
- Appointing a small business restructuring practitioner
Lockdown DPN
A Lockdown DPN is issued when a company has not lodged its BAS or other required statements within 3 months of the due date, making directors immediately personally liable for the company’s tax debts without the option to remit the penalty through company actions.
In these circumstances, the director may become personally liable for the debt, and placing the company into administration or liquidation will not automatically remove the liability.
Understanding whether a DPN is lockdown or non-lockdown is often one of the most important factors when assessing a director’s position.
21-Day Deadline
Once the ATO issues a Director Penalty Notice, directors typically have 21 calendar days from the date of the notice to take action.
Note that the deadline starts from the issue date printed on the notice, not from the date the director receives it.
During this period, directors may need to consider available options to address the underlying liability. The appropriate response will depend on factors such as:
- The type of DPN issued
- The company’s financial position
- Whether tax lodgements were completed on time
If no action is taken within the 21-day period, the ATO may begin pursuing the penalty directly from the director.
How the ATO Recovers Debts
If a director becomes personally liable for a penalty, the ATO may take steps to recover the debt directly from the individual.
The ATO can recover unpaid company taxes from directors through several methods, including issuing garnishee notices, offsetting tax credits against director penalties, and initiating legal proceedings.
Recovery actions may include:
- Debt collection proceedings
- Issuing garnishee notices
- Court enforcement action
- Bankruptcy proceedings
- Legal proceedings
A garnishee notice allows the ATO to collect debts directly from a debtor of the director, which can include financial institutions, employers, or other individuals who owe money to the director. If a director fails to act on a DPN within the specified 21-day period, the ATO can issue a garnishee notice to seize funds from the director’s personal bank accounts. The ATO may also offset tax credits against unpaid amounts owed by the director.
DPN Outcomes
The outcome of a Director Penalty Notice can vary depending on the circumstances surrounding the company and the type of notice issued.
Possible outcomes may include:
- Paying the outstanding tax debt
- Negotiating a payment arrangement with the ATO
- Placing the company into voluntary administration
- Liquidating the company
- Implementing a small business restructuring plan
- If the company paid its tax obligations, directors may have a defense against personal liability.
The most appropriate option will depend on factors such as the company’s financial viability, the director’s personal exposure, whether the DPN is lockdown or non-lockdown, and a careful review of the company’s financial situation.
How Company Directors Can Avoid DPNs
To avoid receiving a DPN, directors should ensure timely lodgement of all Business Activity Statements (BAS), Instalment Activity Statements (IAS), and Superannuation Guarantee Charge (SGC) statements, even if payment cannot be made immediately.
Maintaining a good compliance history with the ATO can significantly reduce the risk of receiving a lockdown DPN, as non-compliance is a major trigger for such notices.
Ignoring a DPN can lead to automatic personal liability for company tax debts, which may escalate to personal bankruptcy if left unresolved. Directors who ignore a DPN risk losing personal assets, such as their family home, as the ATO can pursue them for the company’s unpaid tax debts.
Special Situations
There are several situations where Director Penalty Notices (DPNs) apply differently depending on a director’s role, timing, or involvement in the company.
For example, if only one director pays the DPN, that director may seek indemnity from either the company or other directors under the Taxation Act, which provides the legal basis for these indemnity and recovery rights. It’s important to note that reliance on fellow directors is not a valid defense against a DPN.
Other special situations include:
Liability for New Directors
New directors can inherit liability for pre-existing company debts if they do not ensure the debt is cleared within 30 days of their appointment.
If the company does not resolve the outstanding liabilities within that timeframe, the new director may become personally liable for those debts.
This is one reason why directors are encouraged to review the company’s tax position before accepting an appointment, particularly if the business may already be experiencing financial pressure.
Liability After Resignation
Directors can be held personally liable for company tax debts even after resigning, as long as the debts were incurred during their tenure as directors.
If the company incurred PAYG withholding or superannuation liabilities during the period you were a director, you may still be exposed to penalty notices even after your resignation has taken effect.
This means that simply stepping down from the position will not prevent the ATO from pursuing the penalty if the underlying obligations were not addressed during your tenure.
DPNs After Liquidation
In certain circumstances, the ATO may still issue a Director Penalty Notice even after the company enters liquidation, particularly if the relevant tax obligations were not properly lodged within the required timeframes.
Whether liquidation affects personal liability often depends on when the obligations arose and whether the company met its lodgement requirements.
Because these situations can be fact-specific, directors often benefit from understanding how liquidation interacts with the DPN regime before taking action.
Deregistering a Company With DPN Debt
Deregistering a company does not automatically eliminate outstanding tax liabilities or personal exposure.
If a company is deregistered while outstanding PAYG or superannuation obligations remain unpaid, the ATO may still pursue directors personally through the Director Penalty Notice framework.
Liability Across Multiple Directors
When a company has more than one director, each director can be held personally liable for the full amount of the unpaid tax debt. The ATO is not required to split liability proportionally and may pursue any one or more directors for recovery.
If one director pays the debt, they may have the right to seek recovery or contribution from the company or other directors, depending on the circumstances.
Reliance on Other Directors
Relying on another director, accountant, or internal staff member to manage tax obligations does not remove personal responsibility.
Each director is expected to take reasonable steps to ensure the company meets its lodgement and payment obligations.
Indemnity and Recovery Rights
In some cases, the director who pays a DPN liability may be able to seek indemnity from either the company or other directors under the Taxation Act, which provides the legal basis for these indemnity and recovery rights.
DPN Defence and Personal Liability
Director’s liability for DPN means that if the company fails to pay, the debt can become the director’s personal debt, creating a parallel liability where both the company and the director are responsible until the debt is cleared. This parallel liability is especially relevant when there are multiple directors or more than one director, as the ATO can pursue any or all directors for the unpaid amount.
Directors can avoid personal liability and defend themselves in very limited circumstances if they establish one of the following (according to s269-35 of Schedule 1 of the TAA 1953):
- Illness or Reasonable Non-Participation
- Reasonable Steps Taken like paying the outstanding debt, appointing a voluntary administrator or SBR practitioner or began the process or winding up the company
- Reasonable Arguable Position (SGC/GST only)
If a director receives a Lockdown DPN, the only way to avoid personal liability is to immediately repay the full amount of the debt; otherwise, they become personally liable for the company’s tax debts.
Directors must act quickly upon receiving a DPN, as the ATO can hold the director personally liable for unpaid company tax debts if no action is taken within the specified timeframe.
To defend against a DPN, directors must submit a written statement to the ATO, including supporting documentation that outlines their argument. A tax agent can assist in preparing and submitting this defense to ensure it is handled correctly and increases the chances of success. The defense must cover the entire period during which the director was responsible for managing the company. In some cases, court proceedings may be required to resolve disputes or raise defenses regarding the DPN.
Waiting too long can significantly limit the available solutions and increase the likelihood that the ATO may pursue the penalty personally.
At Halo Advisory, we work for the director. Financial expert Greg Bartels offers a no-obligation, 20-minute consultation to help you understand where you stand, what risks exist, and what options are realistically available before deadlines reduce control. Get in touch today.
FAQs
Does the 10% withholding tax apply to Director Penalty Notices?
Director Penalty Notices are generally issued only for specific company tax obligations, including:
- PAYG withholding from employee wages
- Goods and Services Tax (GST), including Luxury Car Tax (LCT) and Wine Equalisation Tax (WET)
- Superannuation Guarantee Charge (SGC)
These are examples of unpaid company taxes and company debts for which directors can become personally liable if not paid.
The 10% withholding tax on overseas interest is a separate tax obligation. While the company may face penalties for failing to withhold or report the tax correctly, directors are not personally liable for that amount under the Director Penalty Notice provisions.
Is a Director Penalty Notice included in an income tax notice of assessment?
No. A Director Penalty Notice is a separate liability and is not included as part of a personal income tax assessment.
A notice of assessment relates to an individual’s personal income tax position, while a Director Penalty Notice arises when the Australian Tax Office (ATO) seeks to recover certain unpaid company taxes and company debts from the director personally.
Because they are different legal mechanisms, a DPN will normally be issued as a separate notice from the ATO, rather than appearing on an individual’s income tax bill.
Does Single Touch Payroll (STP) reporting prevent a Lockdown DPN?
No. Lodging Single Touch Payroll (STP) reports alone does not satisfy all reporting obligations required to avoid a Lockdown Director Penalty Notice.
While STP reports employee wage and PAYG withholding information to the ATO, directors must still ensure the company lodges its Business Activity Statements (BAS) within the required timeframes.
Even if PAYG amounts are reported through STP, the company must still lodge the BAS separately. If the BAS is not lodged on time, the director may still be exposed to a Lockdown DPN, which can significantly limit the available options for resolving the liability.
In practice, directors need to ensure both STP reporting and BAS lodgement obligations are met to avoid triggering lockdown provisions under the Director Penalty Notice regime.
What happens if you ignore a Director Penalty Notice?
If a Director Penalty Notice is ignored and no action is taken within the 21-day period, the director can become personally liable for the outstanding tax debt, and the ATO may move to recover the amount through enforcement actions such as:
- Debt recovery proceedings
- Garnishee notices
- Court enforcement action
- Bankruptcy proceedings
Because ignoring the notice can significantly increase personal exposure, directors are generally encouraged to understand their position as early as possible. Note: The General Interest Charge (GIC) on these debts is no longer tax-deductible as of 1 July 2025, increasing the effective cost for directors.
Can a director defend a Director Penalty Notice?
In some circumstances, directors may be able to rely on specific legal defences to a Director Penalty Notice. However, these defences are limited and depend heavily on the facts of each situation.
Because these defences are narrowly defined, directors should review the details of their situation carefully and consult a financial adviser early on.
Can the ATO issue a Director Penalty Notice?
Yes, the Australian Tax Office (ATO) can issue a Director Penalty Notice to company directors when certain company debts, such as unpaid company taxes (including PAYG, GST, and SGC), remain outstanding. The ATO may issue a DPN if the company fails to meet its tax lodgement or payment obligations, and directors should respond promptly to avoid personal liability.
What is Director Penalty remission?
Director penalty remission refers to situations where the personal liability created by a Director Penalty Notice may be removed after certain actions are taken.
Remission is generally associated with Non-Lockdown DPNs, where the company lodged its obligations on time but did not pay the underlying tax debt.
Depending on the circumstances, taking specific steps within the required timeframe may allow the penalty to be remitted. However, this option is usually not available where a Lockdown DPN has been issued.
What is the difference between a Statutory Demand and a Director Penalty Notice?
A statutory demand is a formal demand issued by a creditor requiring a company to pay a debt. If the company fails to comply within the required timeframe, the creditor may seek to wind up the company.
A Director Penalty Notice, on the other hand, is issued by the ATO and is designed to make company directors personally liable for certain unpaid tax obligations.
While both processes can arise when a company is experiencing financial difficulty, they serve different purposes and operate under different legal frameworks.
What is the difference between a Garnishee Notice and a Director Penalty Notice?
A Director Penalty Notice creates personal liability for certain company tax debts.
A garnishee notice is a separate enforcement tool used by the ATO to recover unpaid debts by requiring third parties — such as banks or customers — to redirect payments to the ATO instead of the debtor.
In practice, a garnishee notice may be used as part of the ATO’s broader recovery process once liabilities remain unresolved.
How long do directors have to respond to a DPN?
Directors generally have 21 calendar days from the date the notice was issued to take action.
The deadline begins from the issue date printed on the notice, not when the director receives it.
The timeframe is strict. Directors should understand the available options early to preserve more pathways for resolving the situation.
