The ATO doesn’t do titles: director penalty notices explained

Why limited involvement doesn’t protect you

Company tax debt is, in principle, the company’s liability. In practice, directors are often made personally responsible for it, and one of the most common misconceptions is that limited involvement in the company’s finances offers some protection. It doesn’t.

This comes up in a few recurring patterns:

• a co-founder who handles operations while a business partner manages the books;
• a spouse-director appointed to a family company for structuring or lending purposes, with no involvement in its accounts; and
• a founder who has stepped back from day-to-day control without formally resigning as a director.

In each case, the director can be personally liable for the company’s unpaid tax, not because of anything they did, but because of what they didn’t do. What follows sets out why, and what the actual defences require.

What is a Director Penalty Notice?

Under the Taxation Administration Act, directors have an ongoing duty to make sure the company meets its PAYG withholding, superannuation guarantee charge (SGC) and GST obligations.¹

If the company doesn’t, each director becomes personally liable for a penalty equal to the unpaid amount.² That liability:

• arises automatically once the company misses the due date. The notice doesn’t create it; it’s just the step the ATO has to take before it can recover it;³
• runs in parallel with the company’s debt. A payment by the company (or by any director) reduces everyone’s exposure equally; and
• applies to each director separately. The ATO can pursue any one of them for the full amount.

A Director Penalty Notice (DPN) is the formal notice that starts the clock on recovery.⁴

The co-founder and the spouse-director above are both exposed here, in principle, simply because they hold the title, regardless of who actually managed the money.

Why did I get one? What actually triggers a DPN?

A DPN follows unpaid amounts of:

• PAYG withholding (PAYGW), the tax withheld from employee wages;
• SGC, which is what the company owes when it falls behind on employee super; and
• GST.

If the business partner running the books missed a BAS lodgement or let super fall behind, that’s enough to create exposure for every director, not just the one who signed the return.

Lockdown vs non-lockdown. What’s the difference?

This is the distinction that decides whether you have real options or almost none.

Non-lockdown DPN

The company lodged its BAS/IAS and SGC statements on time but didn’t pay. You have genuine choices.

Lockdown DPN

The company didn’t lodge in time. For PAYGW and GST, that generally means not reported within three months of the due date. For SGC, it means not reported by the date the SGC statement was due.⁵ Here, appointing an administrator or restructuring practitioner, or winding the company up, won’t remit the penalty. The only way out of personal liability is for the company’s debt to be paid in full.

Once it’s lockdown, “I wasn’t involved” doesn’t open up any extra options. It just means you find out later than everyone else.

I have 21 days. What are my actual options?

For a non-lockdown DPN, you have 21 days to cause one of these to happen:⁶

• the company pays the debt in full;
• an administrator is appointed;
• a small business restructuring practitioner is appointed; or
• the company begins to be wound up.

A payment plan is not on that list. While an instalment arrangement with the ATO is in force, the ATO can’t sue you for the penalty, but the penalty isn’t remitted.⁷ If the plan falls over, the exposure is still there.

The 21 days runs from when the ATO gives the notice, which is when it’s posted to your address on the ASIC register, not when you open it.⁸

If your ASIC address is out of date, the clock may already be running. Check your details on the register now.

Do none of the above within 21 days, and the penalty can be recovered from you personally.

For a lockdown DPN, only full payment avoids liability.

“I wasn’t really involved in running the company.” Doesn’t that protect me?

This is the defence most directors assume they have. The law does provide for it, but narrowly, and it has repeatedly failed the people who try to rely on it.

The rule is that a director isn’t liable if, because of illness or some other good reason, it would have been unreasonable to expect them to take part in managing the company, and they didn’t.⁹

But the reason has to be objectively good, not just genuinely felt.¹⁰ A complete failure to take part, for whatever reason, is generally not a good reason on its own.¹¹ And not taking part will usually itself be treated as the breach of the director’s duty, whether the director realises it or not.¹²

The leading example comes from a case on an identically worded defence in a related part of the Corporations Act, which the courts have since applied to DPNs. It involved a spouse-director who took on the role because her husband asked her to, trusted him completely to run the company, and never involved herself in its affairs.

She genuinely believed there was nothing wrong with that. She wasn’t being careless by her own standards, just deferential.

On appeal, her sincere and total reliance on her husband wasn’t accepted as a good reason for not taking part, because her non-involvement was, in substance, the very breach the law was concerned with.¹³ The spouse-director and the founder who has quietly stepped back sit in exactly that position.

Being uninvolved isn’t a shield. It’s often the very conduct the duty exists to catch.

“I got outvoted.” Was that enough?

The other defence is that you took all reasonable steps to get the company to pay, or to appoint an administrator or restructuring practitioner, or to begin winding up, or that there were no reasonable steps you could have taken.¹⁴

The courts set the bar high. “All reasonable steps” means dealing with every one of the options, not just the one you tried.¹⁵ Pushing for payment and stopping there, without also considering administration or winding up, isn’t enough. And the defence has to cover the whole period from the due date right through to the end of the notice period, not just the part that’s convenient to explain.¹⁶

If your first attempt fails, the obligation doesn’t end. You’re expected to try another way.¹⁷

The expectation is escalation, up to and including taking steps to put the company into administration yourself if that’s what it takes.

For both defences, it’s on you to prove them, not on the ATO to disprove them.¹⁸

What if I resigned, or I’m a new director?

Resigning doesn’t erase it. You stay liable for penalties that arose while you were a director, and stepping down afterwards doesn’t fix a breach that already happened.¹⁹ If ASIC isn’t notified within 28 days of your resignation, it only takes effect from the date ASIC is notified. You can’t simply backdate it. You’d have to apply to ASIC or the court to fix the earlier date.²⁰

New directors get a short grace period. You become liable for the company’s existing unpaid amounts if they’re still unpaid 30 days after you’re appointed. If the company was already behind on its lodgements when you joined, the three-month lockdown window runs from your appointment date rather than the original due date.²¹ Before you accept a directorship, ask to see the company’s lodgement and payment history with the ATO.

What should I actually do right now?

Timing decides almost everything here. Once the 21-day window on a non-lockdown DPN closes, several of your options are gone for good, not just harder.

• Work out whether the notice is lockdown or non-lockdown. That changes everything about what’s available to you.
• Work out the date the notice was given, not the date you read it, and count 21 days from there.
• Check your address on the ASIC register is current.
• Don’t assume a defence applies because you feel you weren’t really involved. The case law sets a genuinely high bar.
• Get advice before the 21 days runs out, not after. If you know the company is behind on its lodgements, don’t wait for a notice. Getting the lodgements in now can keep you out of lockdown.

Will it affect other proceedings?

If a party to a property settlement is, or was, a director of a family company, this isn’t only a company problem.

Director penalty liability attaches to that director personally, including their house, savings and anything else in their name, regardless of what happens to the company.

For the exposed director, this risk needs to be on the table in settlement negotiations, not discovered afterwards.

For the other party, an unresolved or looming DPN against a spouse who was a director is a real, quantifiable liability affecting the asset pool. It needs to be disclosed and accounted for, not waved away as “the business’s problem.”

In short

“I wasn’t involved” feels like an answer. In law, it’s rarely accepted as one. Not taking part is often closer to the breach than to the excuse.

Whether you’re protected comes down to:

• whether your DPN is lockdown or non-lockdown;
• when the notice was given, and whether you acted within 21 days;
• whether you can show objectively good reasons, for the whole relevant period, for not taking part; and
• whether you took every reasonable step available, not just one.

This is worth a conversation if you are:

• Any director who has received a DPN, lockdown or non-lockdown.
• A silent or spouse-director in a family or small business company, unsure of your actual exposure.
• A founder or co-founder who has stepped back from the finances but is still a registered director.
• A newly appointed director inheriting an existing company’s tax position.
• A party to a family law property settlement where a spouse is or was a company director.

If any of this sounds like your situation, if you’ve received a notice, or you’re worried one is coming, contact us or call 07 5522 5777. We can work with you on a live DPN within the 21-day window, or review your governance and compliance so this kind of personal exposure doesn’t take you by surprise.

Legislation and cases

1. Taxation Administration Act 1953 (Cth) sch 1 s 269-15. ↩
2. Ibid sch 1 s 269-20. ↩
3. Ibid sch 1 s 269-20(2). ↩
4. Ibid sch 1 s 269-25. ↩
5. Ibid sch 1 s 269-30(2) table items 1, 3 and 5. ↩
6. Ibid sch 1 ss 269-15(2), 269-30(1). ↩
7. Ibid sch 1 s 269-15(3). ↩
8. Ibid sch 1 ss 269-25(4), 269-50; Deputy Commissioner of Taxation v Tannous [2016] NSWSC 1654, [92]–[93], [102]–[105]. ↩
9. Taxation Administration Act 1953 (Cth) sch 1 s 269-35(1). ↩
10. Deputy Commissioner of Taxation v Robertson [2009] NSWSC 597, [102]–[103], decided under the predecessor provision, Income Tax Assessment Act 1936 (Cth) s 222AOJ(2). ↩
11. Ibid. ↩
12. Deputy Commissioner of Taxation v Clark [2003] NSWCA 91, [174]–[175] (Hodgson JA); applied in Deputy Commissioner of Taxation v Robertson [2009] NSWSC 597, [107]. ↩
13. Deputy Commissioner of Taxation v Clark [2003] NSWCA 91, [168] (Spigelman CJ), [174]–[175] (Hodgson JA), decided under Corporations Act 2001 (Cth) s 588FGB(5); applied to the director penalty defence in Deputy Commissioner of Taxation v Robertson [2009] NSWSC 597, [106]–[107]. ↩
14. Taxation Administration Act 1953 (Cth) sch 1 s 269-35(2). ↩
15. Roche v Deputy Commissioner of Taxation [2015] WASCA 196, [34]–[35], applying Canty v Deputy Commissioner of Taxation [2005] NSWCA 84, [40]–[41]. ↩
16. Canty v Deputy Commissioner of Taxation [2005] NSWCA 84, [42]–[45], decided under Income Tax Assessment Act 1936 (Cth) s 222AOJ(3); see also Roche v Deputy Commissioner of Taxation [2015] WASCA 196, [40]. ↩
17. Ibid [41]. ↩
18. Taxation Administration Act 1953 (Cth) sch 1 s 269-35(4). ↩
19. Taxation Administration Act 1953 (Cth) sch 1 s 269-20(1)(b) and note; Canty v Deputy Commissioner of Taxation [2005] NSWCA 84, [13]–[14]. ↩
20. Corporations Act 2001 (Cth) s 203AA(1)–(2). ↩
21. Taxation Administration Act 1953 (Cth) sch 1 ss 269-20(3)–(4), 269-30(3). ↩