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Director penalty notices

29 Oct 2010

As we reported in July 2010, the Tax Laws Amendment (Transfer of Provisions) Act 2010 essentially transferred Director Penalty Notice (DPN) provisions from the Income Tax Assessment Act 1936 (ITAA) to the Taxation Administration Act 1953 (the Act). The Act now authorises the ATO to collect outstanding tax from company directors personally. This is achieved in the form of a penalty in a monetary sum equivalent to the unpaid taxes.

Significant changes

Once a DPN is issued, the company director(s) have 21 days within which to comply with the Act. Under the old regime, company directors had 14 days within which to remit the penalty.

The act clarifies that the period of time runs form the date of posting (and not the date of receipt). This means that if a demand is posted from, say Launceston and is sent to Broome, even if it takes 7 days to get there, the demand was effective and the time runs from posting.

Under the ITAA, a director could comply with a DPN in three different ways, being:

  1. payment of the debt in full to the ATO;
  2. entering into an agreement with the commissioner to make instalment payments; or
  3. appoint some form of external controller (be it an administrator or liquidator) to the company.

Given earlier difficulties with creditor voluntary liquidation process, the preferred approach was previously to appoint voluntary administrators under 436A of the Corporations Act. That process has been streamlined some time ago, meaning it is equally available and convenient as the VA process.

The Act has removed the second option, meaning that a company director can no longer have the company enter into an instalment payment agreement in order to satisfy the DPN. The rationale behind this is that doing so merely delays the ATO from taking inevitable recovery action.

So, pursuant to Subdivision 269B, a company director can only comply with the DPN by:

  1. complying with the obligation to pay the tax debt in full to the ATO; or
  2. appointing some form of external controller (be it an administrator or liquidator) to the company.

Company directors have a positive obligation to ensure that any deducted or withheld tax is paid, or other remedial action is taken, at the time that those monies are due for payment.

If Subdivision 269B is not complied with within the 21 day period, each person who was a director of the company at any time during the period in which the tax debts were incurred and when the DPN was due to be complied with, is liable to pay to the commissioner an amount equal to the unpaid amount of the company’s liability to the ATO.

This is an all encompassing provision, capturing even those who became a director of the company on the day that the DPN was required to be complied with, regardless of whether the new director had knowledge of the debt owned to the ATO (s222AOD). Further, those directors who resign during the period will remain liable.


It is a defence to failing to comply with a DPN if the company director can show that:

  1. because of illness or for some other good reason the director did not take part in the management of the company at any time when the person was a director and the directors were under the obligation imposed by the DPN; or
  2. the director took all reasonable steps to ensure that the other directors complied with the DPN or that there were no steps that the director could have taken.

Under the previous regime, it was a relatively low threshold to prove illness or ‘some other reason’ why the person was not acting in a managerial role. As of July 2010, a director will need to show that it would have been unreasonable to expect the director to have taken part in the management of the relevant company during that period.

In determining what a reasonable step is for the purposes of a defence, the court may have regard to when and for how long the person was a director and took part in the management of the company and all other relevant circumstances.

In effect, the changes bring the DPN defences into line with the defences open to directors under insolvent trading provisions.

What this means for directors

A director of a company that has been issued with a DPN must take all reasonable steps to comply with the DPN at the time it is issued, or the director(s) run the risk of falling foul of the Act.

Where a company is able to pay and the defences mentioned above do not apply, the most cost effective resolution to a DPN is to make payment of the deducted or withheld taxes.

The commercial recovery and restructuring team specialises in giving advice to directors, companies and insolvency practitioners in relation to these provisions in the field of insolvency.