ATO warns of increasing risk of director penalty notices — what you need to know

The last 12 months has seen an escalation in debt collection activities instigated by the Australian Taxation Office (ATO) with respect to businesses, resulting in a subsequent increase in the rate of insolvencies. Where the ATO is unable to recover a tax debt directly from a company due to liquidity issues, it can seek to recover those debts personally from directors, via the director penalty regime.

The current landscape

In December 2024, CreditorWatch reported that 33.6% of private businesses with ATO tax ‘debt defaults’ (defined as debts which exceed $100,000 that are over 90 days overdue) had either become insolvent or voluntarily closed during the past year. While the ATO had adopted a lenient approach during the COVID-19 pandemic, this led to a surge in outstanding tax liabilities, approximately $52 billion of which $34 billion was owed by small and medium enterprises.¹

On 25 February 2025, during an address to the Senate Economics Legislation Committee, Commissioner of Taxation Rob Heferen (Commissioner) noted that only 22,000 taxpayers were responsible for $11 billion of the total tax debt value. The Commissioner stated that the ATO would take a deliberate and targeted approach, by taking action against those who repeatedly refuse to engage with the ATO. The ATO will be moving more urgently to deploy the full powers available to it, including issuing director penalty notices (DPNs) and commencing winding up action.

In this current climate, if a company has outstanding tax liabilities, it is critical that the directors engage with the ATO at an early stage to manage payment of these debts. This early engagement process will act to deter the ATO from issuing DPNs against the directors.

Overview of the director penalty regime

The director penalty regime operates to hold directors personally liable for specified tax liabilities of their company. The regime broadly applies to a company’s unpaid pay-as-you-go (PAYG) withholding, GST and superannuation guarantee liabilities.

The regime operates by placing a statutory obligation on directors to ensure their company complies with its tax obligations. This statutory obligation commences on the ‘initial day’ i.e. the last day of a tax period or GST instalment quarter. If the company fails to comply with its payment obligation by the end of the due day, a penalty equal to the amount of the company’s obligation becomes due and payable by the director.

Directors must understand that, under the legislation, if a company fails to pay its tax debts, their personal liability becomes automatic. The issuing of the DPN is merely a procedural step to enable the Commissioner to commence proceedings to recover these penalties.

Lockdown or non-lockdown DPNs

Non-lockdown DPNs

If a company has made timely reporting of its obligations (even if it has not paid them), the ATO will issue a ‘non-lockdown’ DPN.

A non-lockdown DPN is issued where a company has reported all of its tax obligations in a timely manner, i.e. the company must have lodged its business activity statements (BAS) and instalment activity statements within three months after the due date for lodgment, and its superannuation guarantee charge (SGC) statements within one month and 28 days after the end of the quarter to which the unpaid superannuation contributions relate.

For instance, in respect of SGC, the relevant reporting dates are as follows:

Where the ATO issues a non-lockdown DPN, the director penalty will be remitted (i.e. waived by the ATO) if the director appoints a voluntary administrator or a small business restructuring practitioner, or the company begins to be wound up, within 21 days from when the date that the DPN was issued.

It is vital for directors to be aware that the 21-day period commences from the date that the ATO posts the DPN, rather than the date of receipt, and cannot be extended in any circumstances. Upon receiving a non-lockdown DPN, directors must act swiftly to make a relevant appointment within the statutory period. If this does not occur, the director will be liable to make payment of the full penalty; this is the only way it can be remitted.

Lockdown DPNs

If a company has failed to report its obligations in a timely manner, the ATO will issue a lockdown DPN. Under this DPN, the penalty cannot be remitted by the director appointing an administrator, a small business restructuring practitioner, or commencing to wind it up. The penalty is ‘locked down’ and the only way to obtain remission is to make full payment of the debt.

It is therefore critical that directors report their company’s liabilities on time, even if the company is unable to pay the amounts owing on the date of lodgment. Businesses that are required to lodge monthly BAS will need to be acutely aware of their recurrent lodgment deadlines, to ensure that any potential director penalties are not locked down.

Defences

The defences to a DPN are extremely narrow. However, if you consider that one of the defences applies, you should raise this defence with the ATO through its early engagement process.

The defences are briefly as follows:

1. Because of illness or for some other good reason, it would have been unreasonable to expect the director to take part in the management of the company at any time — this requires that the director is incapacitated during the whole period of directorship.
2. The director took all reasonable steps to ensure the company paid the liability, or appointed an administrator or small business restructuring practitioner, or commenced to be wound up. Alternatively, there were no reasonable steps that could have been taken to ensure that any of those things happened.
3. The company treated the GST or superannuation guarantee legislation as applying in a way that was reasonably arguable, and took reasonable care in applying the legislation to the relevant matter.

These defences are strictly applied, and rarely successful. As noted above, to establish the ‘illness’ defence, the director must demonstrate there was good reason for their non-participation of the management in the company throughout the whole directorship period.

The ‘reasonable steps’ defence will fail if the director has relied on others to manage the company’s financial affairs without making further inquiries. For this reason, individuals who are ‘sleeping’ or passive directors may wish to consider resigning from their roles due to the heightened risk of exposure under the director penalty regime.

Further, in order to mount a ‘reasonably arguable position’ defence with respect to superannuation guarantee or GST, directors will need a strong personal awareness of any specific issues in respect of the company’s compliance or any legislative interpretations that have been taken in applying the GST or superannuation guarantee provisions.

Key takeaways

Due to the increased ATO debt collection activities, we will continue to see significant numbers of DPNs being issued. To mitigate the risk of a lockdown DPN, directors must have a strong grasp of their company’s reporting systems and ensure all lodgment deadlines are met.

Directors should also undertake early engagement with the ATO to manage payment of the company debt. The Commissioner will not commence proceedings against a director to recover a penalty while there is an instalment arrangement in place with the company, providing the company complies with the arrangement.

As the Commissioner stated, the ATO will take recovery action against those “who repeatedly refuse to engage with us and continue to ignore our reminders”. Accordingly, early engagement and continued dialogue with the ATO will mitigate against the risk of a DPN being issued.

How can Rigby Cooke Lawyers help?

If you receive a DPN, you must act immediately and seek legal advice. We can represent you in the early engagement process and work with you to make submissions to the ATO to assist in the remission of your liabilities or negotiate payment plans.

_References

^{1. CreditorWatch publication: ‘A third of private businesses with ATO debt default of $100k or more close in past year’ (20 December 2024).}