Director Penalty Notices – the Sword that Pierces the Corporate Veil

In my time in the legal profession, I have seen far too many directors of private companies fall victim to the Australian Taxation Office (ATO) for no reason other than plain ignorance of their obligations and duties.

People often elect to set their business up as an incorporated entity under the Corporations Act 2001 (Cth) (Corporations Act) to protect themselves personally using the corporate veil. Unfortunately, if you or your company does not comply with your duties and obligations, the corporate veil can be pierced by the ATO and their statutory powers, leaving you and your personal assets exposed and vulnerable.

One of the statutory weapons wielded by the ATO is the Director Penalty Notice (DPN). The DPN is a recovery tool for company debts targeting Pay as You Go (Withholding) (PAYGW) and Superannuation Guarantee Charges (SGC). By failing to comply with a DPN one or multiple directors will become personally liable for the PAYGW or SGC debt withheld from the ATO.

The ATO inherits its statutory power to issue a DPN from Division 269 in Schedule 1 to the Taxation Administration Act 1953 (Cth) (the TAA).

So now we know that the Tax Office has statutory powers which can pierce the corporate veil to recover PAYGW and SGC liabilities, but how exactly does a DPN work?

There are two types of DPNs:

  • A standard or “non-lockdown” DPN; and

  • What is commonly referred to as a “Lockdown” DPN.

Standard DPNs

A standard DPN is a notice issued by the ATO when a Business Activity Statement (BAS) or Instalment Activity Statement (IAS) is lodged as required, but the liability remains unpaid.

The DPN will be posted to the Director’s nominated ASIC address, state the company’s unpaid liability and require one of the following be completed within 21 days from the date of the notice:

  1. Payment of the liability in full (which may include an administrative fee);

  2. The company to voluntarily appoint an administrator; or

  3. Enter the company into liquidation.

If you fail to comply with the notice within in the 21-day period, the notice and liability will crystallise, and you, as a director, will become personally liable for the amount/amounts set out in the DPN. Upon the debt crystallising, the next step is the ATO will commence debt recovery proceedings against you personally for the withheld PAYGW and/or SGC.

Lockdown DPNs

A Lockdown DPN is issued if the company fails to lodge its BAS or IAS within three months of the required lodgement date. If a Lockdown DPN is issued, the notice can only be satisfied by payment of the full liability within 21 days of the date of the notice. Even if you appoint an administrator or place the company into liquidation in the 21-day period, you will become personally liable for the amount stated on the notice until the liability is paid.


If you fail to comply with a DPN, you may still have a defence available to you, however evidence of the defence must be provided to the ATO within 60 days of the date of the notice.

The defences are:

  1. You are not liable for a DPN if, because of illness or some other good reason, it would have been unreasonable to expect you to take part, and you did not take part, in the management of the company at any time when:

    1. You were a director of the company; and

    2. The directors were under the relevant obligations under subsection 269-15(1); or

  2. You took all reasonable steps to ensure that one of the following happened:

    1. The directors caused the company to comply with its obligation;

    2. The directors caused an administrator to be appointed; or

    3. The directors caused the company to begin to be wound up; or

  3. There were no reasonable steps you could have taken to ensure that any of those things happened.

Important Points to Note

DPNs have qualities that make them unique compared to other powers the ATO hold.

Firstly, the time for compliance with both standard and Lockdown DPNs is 21 days from the date of the DPN and not the date you receive the notice. This means that the 21-day period has generally already commenced by the time you receive the notice (if you receive it at all).

Secondly, the ATO is not required to prove that you received the DPN, the ATO is only required to prove that the notice was posted to your address registered with ASIC.

Further to this point, far too often directors overlook their obligation to update their personal details with ASIC. Pursuant to s 205B (4) of the Corporations Act, a company must lodge with ASIC notice of any change to the personal details of a director, or alternate director within 28 days after the change. By not completing this seemingly mundane and trivial the task, the ATO could issue a DPN to an address at which you no longer reside, and the debt crystallises without you being aware that a notice had been issued.

Thirdly, even if you weren’t a director at the time of incurring the liability or failing to lodge the required BAS or IAS, a director may be liable for PAYGW and SGC debts after being a director of a company for 30 days.

Finally, the ATO is not perfect and can make mistakes when issuing a DPN. These mistakes may make the DPN invalid. As such, you should always seek professional advice regarding a DPN you receive.


Always keep ASIC up to date regarding any changes to personal or company information, regardless of how mundane or trivial you perceive the task to be.

Your business operating as an incorporated entity does not guarantee that your personal assets are protected. The ATO has several statutory powers that allows it to pierce the corporate veil and make directors personally liable for their company’s debts.

If you receive a DPN, you have a short timeframe (less than 21 days) to comply with the notice. If you fail to comply with the notice you become personally liable for the debt being claimed. As such, you should seek urgent professional advice in relation to the validity of the DPN and the effect it may have on you personally.

Finally, if you take the “bury your head in the sand” approach with respect to the lodgement of BAS and IAS, you may find yourself liable for any unpaid PAYGW and/or SGC, irrespective of whether you voluntarily appoint an administrator or enter the company into liquidation.

If you require professional advice in relation to a DPN, please do not hesitate to contact Active Law.[/fusion_text]

Disclaimer: Reliance on content.
The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.