One of the main advantages of running a business through a company structure is that it limits personal liability for company debts. However, Director Penalty Notices (DPNs) change the game. If your company fails to meet its tax obligations, the ATO can hold you personally liable for specific debts through a DPN, putting your personal financial security at risk.
This article explains how DPNs work, what they cover, and how they impact you as a director.
What is director liability under a DPN?
When the ATO issues a DPN, it creates a parallel liability for the unpaid tax debts. This means that while the company owes the debts, directors are also personally liable for the same amounts.
For example, if your company owes $150,000 in PAYG withholding tax and you receive a DPN, the ATO can pursue you personally to recover that amount if the company doesn’t pay.
How does the ATO enforce liability?
Once liability is established through a DPN, the ATO can use enforcement measures to recover the debts, including:
Seizing personal assets (e.g. your home, car, or investments).
Garnishing wages or bank accounts. (This means the ATO can collect money directly from your wages or a bank account to settle an unpaid debt.)
Filing for your personal bankruptcy if the debt remains unpaid.
What tax debts are covered by DPNs?
DPNs apply to specific tax debts the company owes to the ATO, including:
1. Pay-As-You-Go (PAYG) Withholding Tax
This is the tax your company withholds from employee wages to pay to the ATO. Failure to remit PAYG withholding on time is one of the most common triggers for DPNs.
2. Goods and Services Tax (GST)
If your company collects GST on sales, that amount is owed to the ATO. If GST remains unpaid, it can lead to a DPN.
3. Superannuation Guarantee Charge (SGC)
Employee superannuation contributions are legally required. Unpaid or late-paid super can result in personal liability through a DPN.
How director liability varies by DPN type
The type of DPN issued significantly impacts the extent and immediacy of your personal liability:
21-Day DPNs
Personal liability can be avoided if you act within 21 days of the notice being mailed.
Actions such as appointing a Small Business Restructuring practitioner, voluntary administrator, or liquidator can clear liability.
Lockdown DPNs
Personal liability is immediate, with no grace period for action.
Applies to debts for BAS, IAS and/or SGC returns lodged late or not at all.
Key tip: Understanding the type of DPN you’ve received is critical to determining your options and liabilities.
Personal assets at risk
Director liability under a DPN means your personal assets can be used to repay company tax debts. The ATO may pursue:
Your home: If you own real estate, the ATO can place a charge or lien on the property.
Savings and investments: Bank accounts, shares, and other assets can be seized.
Vehicles or equipment: Personal property of value may also be taken to satisfy the debt.
What about jointly owned assets?
Even assets you own jointly with another person, such as a family home, could be at risk. The ATO may pursue your share of the equity in such assets.
How to protect yourself from DPN liability
1. Stay compliant with tax obligations
Ensure all BAS, IAS and SGC returns are lodged on time—even if you can’t pay in full. Timely lodgement can prevent debts from becoming lockdown DPN liabilities.
2. Address financial difficulties early
If your company is struggling to meet its tax obligations, consult insolvency or restructuring experts immediately. They can help you take proactive steps to avoid a DPN.
3. Keep ASIC details updated
DPNs are sent to the director’s address listed with ASIC. If your address is outdated, you may not receive the notice, leading to missed deadlines and automatic liability.
4. Seek professional advice
Insolvency practitioners and restructuring experts can guide you through the best options to protect your assets and resolve the company’s financial issues.
What happens if a director resigns?
Resigning as a director does not automatically absolve you of liability under a DPN. If the debts were incurred while you were a director, you can still be pursued for them.
Resignation rules to note
Resignation must be formally lodged with ASIC.
If the resignation date isn’t registered with ASIC within 28 days, you remain liable for debts accrued after your intended resignation date.
Real-life example: Personal liability after ignoring a DPN
Tom was a director of a manufacturing company that owed $200,000 in unpaid PAYG withholding tax. When the ATO issued a 21-day DPN, Tom delayed action, assuming the company would resolve the issue later. By the time he sought help, the 21-day deadline had passed, and Tom was personally liable for the full amount.
To repay the debt, Tom had to sell his family home and cash out his retirement savings.
FAQs about director liability and DPNs
Q: Can I negotiate a payment plan with the ATO to avoid liability?
No. While payment plans can help the company manage debts, they do not prevent personal liability under a DPN.
Q: Does a Small Business Restructuring (SBR) plan clear my personal liability?
Yes, if started within the 21-day period for a 21-day DPN. However, lockdown DPN liabilities must be paid in full.
Q: Can the ATO pursue my assets indefinitely?
Yes. Lockdown DPN debts remain enforceable indefinitely unless resolved.
Key takeaways
Director Penalty Notices significantly alter the protections usually provided by a company structure. Understanding how they create personal liability, which assets are at risk, and how to respond is essential for any director.
If you’ve received a DPN or are concerned about potential liability, contact Business Reset today. Our team of experts can help you navigate your options and protect your personal financial future.
Read next: How to avoid a lockdown DPN: Compliance tips for directors
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