What is a Director Penalty Notice?

A director penalty notice (sometimes called a DPN) is a serious document, so it is important that you are aware of your rights and responsibilities in the matter.

A director penalty notice is issued to a director of a company that has not complied with its taxation obligations.

The director penalty notice makes the director of the company personally liable for certain taxation obligations.

Director penalty notices are governed under the Income Tax Assessment Act 1936.

This article will outline some of the basics of directors’ penalty notices and explain what you can do if you receive one.

Been given a director penalty notice? Be referred to the best tax dispute lawyers on the Sunshine Coast

What is a Directors Penalty Notice?

A director penalty notice is a notice sent out by the Australian Tax Office (ATO) to the director of a company to make them personally liable for the debts of the business.

The director penalty notice makes the director liable for unpaid Pay As You Go, Superannuation Guarantee Charge, and Goods & Services Tax.

Some give you 21 days to take a step or pay, and some are immediate.

What are the Requirements of a DPN?

In order for a director penalty notice to be valid, several actions must be carried out by the ATO. These include:

1. The notice must be in writing; and
2. It must clearly state that the director of the company must pay the debts; and
3. It must contain the amount of debt owed; and
4. It must contain when the penalty will be discharged.

Types of Director Penalty Notices

There are two types of directors’ penalty notices that one can be served.

The first is a traditional notice, otherwise known as a 21-day notice, that allows the director a 21-day period to act to avoid legal liability.

The second type of notice is a lockdown notice, an immediate passing on of liability to the director.

Traditional Director Penalty Notice

A traditional notice, or a 21-day notice, is a type of directors’ penalty notice that requires the director of the company to complete what the notice states.

If the responsibilities indicated within the notice are not completed within 21 days of its posting the director will face personal liability.

A director may receive a notice of the sort if the company is yet to pay tax debts to the ATO, specifically debts that have been reported, within a three-month period of the debt due date.

As stated directly in Division 269-15 of the Taxation Administration Act 1953:

The directors of the company (from time to time) continue to be under their obligation until:
(a) the company complies with its obligation; or
(b) an administrator of the company is appointed under section 436A, 436B or 436C of the Corporations Act 2001; or
(c) a small business restructuring practitioner for the company is appointed under section 453B of that Act; or
(d) the company begins to be wound up (within the meaning of that Act).

Lockdown Director Penalty Notice

A lockdown penalty notice is a type of director notice that immediately places personal liability on the director of a company for all tax-related debts.

The ATO will send a lockdown notice if the business has outstanding tax debts that have not been reported that are at least three months overdue.

An individual or director will generally not have personal responsibility for the debts a company owes as it is seen in law as a separate entity from the individual.

Personal liability, however, creates a situation where the director of a business is solely responsible for the payment of outstanding debts.

The ATO may decide this form of a director penalty notice is appropriate as it prevents the director from placing the business into liquidation and therefore avoiding debts as with personal liability, as aforementioned, the director must pay regardless.

Been given a director penalty notice? Be referred to the best tax dispute lawyers on the Sunshine Coast

When will the ATO Issue a Director Penalty Notice?

The ATO will generally send out a director penalty notice to any company that has been noted as avoiding or not working towards resolving tax issues or paying debts.

This further applies to businesses that are not working specifically with the ATO to resolve said issues.

The ATO has an established plan on their site that establishes a list of “stronger actions” and when they will put them into use.

It is stated that a form of stronger action includes a director penalty notice, and will be used when debtors:

Are unwilling to work with the ATO;
Repeatedly default on agreed payment plans;
Don’t have the capacity to pay and do not take steps to resolve their issue;
Have been subject to an audit where they detect deliberate avoidance and payment avoidance continues;
Appear to be engaging in phoenix activity (using liquidation to avoid financial obligations without risking assets and to resume business operations through a new entity).

What Options does a Director Have?

There are a limited number of options a director may have when served with a director penalty notice and will vary depending on the nature of the notice.

If a director has been sent a lockdown notice, the only option they will have to have the notice remitted is to pay off the debts as the notice states.

However, if the director has been sent a traditional notice, there are a few different options that they have. These include:

1. Paying the debt off in full;
2. Appointing a liquidator to wind up the business;
3. Appointing an administrator to oversee the business;
4. Appointing a small business restructuring practitioner;
5. Providing a defence for the notice.

If the director wishes to take action against the notice, they must do so within 21 days of the ATO’s posting of it.

It is important to understand that the period you have to take action begins from the posting of the notice, not the receiving of it!

Possible Defences for a Directors Penalty Notice

There are two significant defences on can use in the case of a directors’ penalty notice; the defence of illness and the defence of reasonable steps.

These defences will generally only be used in the case of (potential) personal liability.

The Defence of Illness

The defence of illness, to put it simply, is a defence stating that due to illness, the director of the company was unable to physically take action in the management of the company during the period of relevance.

For this defence to be taken into account, the director must have been unable to manage the company at all relevant times.

The Taxation Administration Act 1953 outlines the defence and when it can be used, stating in divisions 269-35 (1) that:

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:

you were a director of the company; and 
the directors were under the relevant obligations under subsection 269-15(1).

So, illness which meant that you could not participate in the running of the company at all relevant times – is a defence.

The Defence of Reasonable Steps

The defence of reasonable steps is a defence used in a situation of a director penalty notice that practically entails that the director of the company took all reasonable steps to carry out obligations of debt.

The Taxation Administration Act 1953 also explains the terms of the defence of reasonable steps, stating in sections 269-35 (2) that:

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

1. you took all reasonable steps to ensure that one of the following happened:
2. the director caused the company to comply with its obligation;
3. the directors caused an administrator of the company to be appointed under sections 436A, 436B, or 436C of the Corporations Act 2001;
4. the directors caused a small business restructuring practitioner for the company to be appointed under section 453B of that Act;
5. the directors caused the company to begin to be wound up (within the meaning of that Act); or
6. there were no reasonable steps you could have taken to ensure that any of those things happened.

Been given a director penalty notice? Be referred to the best tax dispute lawyers on the Sunshine Coast