If you receive a Director Penalty Notice (DPN) first check what type it is. For a non-lockdown DPN, directors may reduce personal liability through payment, administration, or liquidation within strict timeframes. For a lockdown DPN, liability is usually unavoidable unless the debt is paid in full. Seek professional advice early.
On This Page
- Introduction
- What happens when Director Penalty Notices Are Issued?
- What to Do if You Receive a DPN
- Next Steps
- FAQs
Introduction
A Director Penalty Notice (DPN) is issued by the ATO to recover unpaid company tax obligations, making directors personally liable for these debts if they are not paid by the due date.
Many directors are unsure what happens once a director penalty notice is issued and how quickly they need to act, or whether personal liability can still be avoided. The situation can become even more serious where the company is already experiencing cash flow pressure or ongoing tax compliance issues.
The consequences — and available options — often depend on whether the notice is a non-lockdown DPN or a lockdown DPN. While some directors may still have limited restructuring or insolvency options available, others may face serious consequences, including immediate personal exposure if urgent action is not taken.
This blog explains what happens when a Director Penalty Notice is issued, how the ATO may enforce recovery action, and the practical steps directors can consider to protect themselves and respond appropriately.
What Happens Once a Director Penalty Notice Is Issued?
Once the Australian Taxation Office decides to issue a DPN, it is sent to the residential address registered with Australian Securities and Investments Commission (ASIC).
The notice outlines the unpaid liabilities, such as PAYG withholding, goods and services tax (GST), or superannuation (SGC) obligations.
What usually happens includes:
- Directors have 21 days to take action from the time ATO issues a Director Penalty Notice (DPN) to avoid personal liability for unpaid company debts.
- Directors must respond to the notice within this timeframe.
- Directors may become personally liable for unpaid company tax liabilities if no action is taken within the required timeframe.
- The ATO can begin recovery action for the unpaid amounts against directors personally if the debt remains unresolved.
What to Do if You Receive a DPN
There are two types of Director Penalty Notices (DPNs) issued by the ATO: non-lockdown DPNs and lockdown DPNs.
Non-Lockdown DPN
A non-lockdown DPN generally applies where the company has lodged its business activity statements (BAS), PAYG withholding, and superannuation reporting obligations within the required timeframes, even if the debts remain unpaid.
In these situations, directors may still have limited options available to reduce or avoid personal liability if action is taken quickly within the 21-day response period.
Possible steps can include:
- Pay the debt in full
- Negotiate a repayment arrangement with the ATO
- Appoint a voluntary administrator
- Place the company into liquidation where appropriate
- Get small business restructuring or insolvency advice before deadlines expire
If the 21-day timeline expires for a Non-Lockdown DPN, the director can face aggressive enforcement actions from the ATO.
Lockdown DPN
A lockdown DPN is issued when a company fails to lodge its BAS within 3 months of the due date, resulting in immediate personal liability for directors without the option to remit the penalty through other actions. In these cases, directors are usually held personally liable for GST or SGC debts once the DPN is issued.
Unlike a non-lockdown DPN, placing the company into voluntary administration or liquidation will not usually remove personal liability under a lockdown DPN. The ATO can issue a DPN after a company has gone into liquidation, and the recovery of director penalties can continue indefinitely if the DPN is a lockdown type.
Directors should immediately:
- Confirm the amount and type of tax debt involved
- Review whether the lodgements were completed late or remain outstanding
- assess both the company’s financial situation and their personal financial situation
- Seek urgent legal, insolvency, or restructuring advice
- Explore whether payment arrangements or settlement discussions with the ATO may still be possible
Failure to address a DPN can result in the ATO pursuing the director for unpaid tax debts, which may include garnishing personal bank accounts or other assets. Early advice from professional advisers, insolvency specialists, or a tax agent can significantly improve the chances of preserving business options and limiting further recovery action.
Next Steps
If a Director Penalty Notice (DPN) is issued, acting quickly can help directors reduce personal liability and preserve more options for resolving the situation. Directors who ignore a DPN risk losing personal assets, such as their family home, if the ATO takes legal action to recover the debts.
Delaying action may increase the risk of personal recovery proceedings and limit available restructuring or insolvency pathways.
Practical next steps include:
- Review the DPN carefully, including the debt amount, issue date, and response deadline
- Confirm whether the unpaid PAYG, GST, or superannuation liabilities are accurate and up to date
- Assess the company’s financial position and determine whether repayment, restructuring, or negotiation is realistically possible
- Contact the ATO early to discuss repayment arrangements or possible solutions before enforcement action escalates
- Seek professional restructuring, insolvency, or legal advice before deadlines expire to understand the risks and available options
Early advice can help directors make informed decisions and respond before the situation becomes more difficult to manage.
At Halo Advisory, we work for you — the director. Financial expert Greg Bartels offers a no-obligation, 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 paying employees before the ATO reduce DPN risk?
Not necessarily. While paying staff is often prioritised during cash flow pressure, unpaid PAYG withholding and superannuation obligations can still trigger personal liability for directors.
Can directors avoid liability under a Non-Lockdown DPN?
In some cases, yes.
The director must take one of four specific actions within 21 days of ATO posting (likely the date on the letter) a Non-Lockdown DPN to avoid personal liability: pay the debt in full, appoint a voluntary administrator, appoint a small business restructuring practitioner, or appoint a liquidator.
A non-lockdown DPN can be issued when a company has lodged its Business Activity Statements (BAS) within 3 months of their due date, allowing directors to avoid personal liability if they take action within 21 days.
Even where the company paid part of the debt or entered discussions with the Australian Tax Office, directors should still obtain urgent advice because simply negotiating informally does not always remove director’s liability.
Can former or new directors still be liable for old tax debts?
Yes.
This personal liability can extend to former directors for unpaid debts accrued during their tenure and new directors can become liable for historical debts if they remain unpaid 30 days after their appointment.
This can apply even where multiple directors or fellow directors were involved in the management of the company during the entire period the liabilities arose.
What happens if directors ignore a DPN?
If a director fails to act on a DPN within the 21-day period, the ATO may pursue recovery actions, which can include garnishing wages or bank accounts.
The ATO can deploy various enforcement measures including garnishee notices, tax credit offsetting, asset liquidation, personal bankruptcy, director disqualification, and credit rating damage against a director who ignores a DPN.
The Australian Tax Office can also commence legal proceedings to recover certain tax debts personally if directors fail to respond appropriately.
What is parallel liability under a DPN?
Parallel liability means that all directors of a company share equal responsibility for unpaid tax debts, making each director liable for the full amount stated on the Director Penalty Notice (DPN).
If a company has multiple directors, each director is likely to owe the same amount under the parallel liability framework, as the company’s debt and the director penalty liability are interconnected.
When a payment is made towards either the company’s liability or a director’s liability, it reduces the liability for both equally due to the nature of parallel liabilities.
This means the ATO can recover the debt from any one of the directors, regardless of internal arrangements between directors themselves.
Can directors defend a DPN?
Directors can defend against a Director Penalty Notice (DPN) if they can prove that they took reasonable steps to ensure the company met its tax obligations during the relevant period.
What happens if a director is overseas when a DPN is issued?
A Director Penalty Notice (DPN) can still be valid even if the director is overseas, provided the notice issued was sent to the ASIC-registered address recorded with Australian Securities and Investments Commission (ASIC).
Being overseas does not automatically stop the 21-day response period or prevent personal liability from arising.
Can a company continue trading after a Director Penalty Notice is issued?
In some cases, yes. Whether the business can continue trading safely depends on its financial position, cash flow, and whether directors can meet ongoing obligations without worsening insolvency risks.
Do Director Penalty Notices affect business partnerships or investors?
They can. Investors, lenders, and business partners may become concerned about financial stability once serious tax recovery action is underway. This is also the case if insolvency risks increase.
Can directors negotiate directly with the ATO after receiving a DPN?
Yes, the ATO may discuss payment arrangements or possible solutions, especially where directors engage early and provide accurate financial information.
What if the company records are incomplete or inaccurate?
Poor financial records can make it harder to dispute debts, negotiate with the ATO, or assess the company’s true position. This often increases pressure on directors during the response period.
Can directors still refinance the business after receiving a DPN?
Possibly, but obtaining finance may become more difficult once significant tax debt and personal liability concerns arise. Lenders often assess these issues very carefully.
Is a Director Penalty Notice a sign the company is insolvent?
Not always, but it can indicate serious cash flow or compliance problems. Some businesses recover successfully, while others may need restructuring or formal insolvency solutions depending on the circumstances.
Can directors remain liable after resigning?
Yes. Directors may still remain liable for unpaid company tax debts that arose during the relevant period they were involved in the company.
This can apply even if other directors remain involved, and can also affect new directors who join while reporting or payment obligations remain outstanding.
Can the ATO recover debts from directors personally?
Yes. If a DPN is not resolved, directors can be held personally liable and the ATO may take recovery action against them directly.
This may include garnishee notice action, legal proceedings, or other steps to recover unpaid amounts from the director personally.
What tax debts can trigger a DPN?
A DPN can be issued for certain unpaid tax liabilities, including GST, PAYG withholding, and superannuation guarantee obligations.
These debts commonly arise where companies fail to lodge or pay their tax obligations within the required timeframes.
