Is your business facing financial uncertainty? Staying on top of tax compliance can be increasingly challenging when cash flow pressures arise. For company directors, missed obligations may trigger a Director Penalty Notice (DPN) from the Australian Taxation Office (ATO), which can have serious implications for personal liability.
Alarmingly, DPNs can be issued years after the initial debt, with interest compounding over time. While these notices are a powerful tool for the ATO to ensure directors meet their obligations, they can have severe consequences for directors and their families — especially when personal assets fall short of covering the accumulated debt.
Last financial year (2023-24), the ATO issued 26,702 DPNs, totalling over $4 billion — a nearly 50% increase from the previous period.
With businesses facing post-pandemic challenges and heightened scrutiny from the ATO, it’s more crucial than ever for directors to understand DPNs and their implications.
This article will break down both types of DPN, explain how recent changes impact directors, and offer practical steps to help business owners and advisors navigate these penalties confidently and safeguard their personal assets.
Types of Director Penalty Notices
Two types of Director Penalty Notices exist: non-lockdown DPNs and lockdown DPNs. Each type carries unique implications for directors, impacting their options for avoiding personal liability.
Non-Lockdown DPNs
Non-lockdown DPNs apply when a company has failed to pay certain tax liabilities, like PAYG (Pay As You Go) withholding tax, GST, or superannuation, but has lodged the required Business Activity Statements (BAS) or Superannuation Guarantee Charge (SGC) statements with the ATO within three months of their due date. In this case, directors have options to avoid personal liability if the company cannot pay the outstanding tax.
Example: Suppose a business lodges its BAS on time but fails to remit the GST due to cash flow issues. The ATO can issue a non-lockdown DPN to the director, who can prevent personal liability by paying the debt or initiating voluntary administration, liquidation or small business restructuring appointment within 21 days of the notice.
Lockdown DPNs
Lockdown DPNs are issued when a company do not lodge the required BAS or SGC statements within three months of their due dates. Under a lockdown DPN, the options for avoiding personal liability narrow considerably; the only way to avoid liability is for the company to pay the outstanding amount in full.
Example: If a business fails to lodge its BAS and pay its GST for more than three months after the due date, the ATO may issue a lockdown DPN. In this scenario, even if the company enters administration, the director remains personally liable unless the debt is paid.
The Growing Prevalence of Lockdown DPNs
In recent years, the ATO has increased its focus on lockdown DPNs — with deregistered companies still at risk.
This shift is significant because lockdown DPNs limit directors’ options, making it even more critical for businesses to lodge their BAS and SGC statements on time — even if they cannot pay the full amount.
This trend highlights the ATO’s focus on ensuring timely compliance, especially for industries impacted by economic disruptions, where non-compliance may be more likely. For directors, staying informed about compliance deadlines is more critical than ever to avoid the severe consequences of a lockdown DPN consequences in the future.
5 Ways for Directors to Avoid Personal Liability
To avoid personal liability from a DPN, directors should follow these steps:
#1 Stay compliant with BAS and SGC filings
Lodging these on time — even if payment is not feasible — can reduce the risk of receiving a lockdown DPN. Implementing a solid compliance system to track deadlines can be invaluable. Accounting software that provides automated reminders can also be beneficial for managing due dates.
#2 Closely monitor company finances
Regularly reviewing financial health can help directors proactively address tax obligations, reducing the likelihood of receiving a DPN. Budgeting for PAYG withholding, GST, and superannuation ensures these obligations can be met without jeopardising cash flow.
#3 Regular audits and reviews
Conducting an internal audit of compliance processes can reveal gaps and confirm that the company is meeting its obligations. While audits might seem like an added expense, they often prove valuable by refining resource allocation and supporting strategic decision-making. A thorough audit allows directors to confidently align budgets with business goals, strengthening operational efficiency and risk management.
#4 Seek professional assistance early
When financial distress arises, consulting professionals can help directors make informed decisions, potentially avoiding penalties altogether.
#5 Consider pre-emptive actions
When struggling to meet obligations, directors should open a line of communication with the ATO to prevent more serious consequences down the track.
If you’ve already received a DPN, read our blog on What Directors Should Do Next for further advice on protecting your personal assets.
Navigating DPNs and Tax Obligations
The distinction between lockdown and non-lockdown Director Penalty Notices can make all the difference in understanding your options and how to protect your personal liability. Knowing which type of DPN your company may be subject to — and what steps to take if one is issued — can significantly impact your ability to manage the situation effectively.
Ideally, directors should navigate the rise in DPNs by keeping up-to-date with their obligations, seeking expert advice, and addressing financial issues proactively.
Our team of experienced advisors is committed to helping directors manage their tax responsibilities effectively, even during challenging times.
If your business is struggling to meet its tax obligations or you’ve received a DPN, contact SALEA Advisory today for a robust plan to safeguard your financial future.
