Director penalty notice defence

Director Penalty Notice Defence

Facing a Director Penalty Notice can be confronting for company directors. While the notice is designed to make directors personally accountable for certain unpaid company tax debts, the law does provide limited situations where a director may rely on a statutory defence.

When the ATO issues a Director Penalty Notice (DPN), it is a warning to a director that they may become personally liable for unpaid company PAYG withholding, GST and Superannuation. In limited circumstances, however, a director may be able to rely in a statutory defence to avoid personal liability.

It is important to distinguish between:

• Actions that can stop enforcement (such paying the debt or appoint an administrator), and
• Legal defences, which excuses a director from liability altogether.

The ATO recognises only a narrow set of defences under the director penalty notice regime.

When Can a Director Rely on a Defence?

A defence is generally raised after a director penalty has been imposed and the ATO has commenced, or is considering, recovery action. Directors must apply in writing to the ATO, usually within 60 days of recovery action starting.

If a defence is raised outside this timeframe, the ATO may still consider it, but the decision may not be reviewable under administrative law.

Statutory Defences Available to Director

1. Illness or other acceptable reason

A director may have a defence if, due to illness or another acceptable reason, they:

• did not take part in the management of the company during the relevant period, and
• it would have been unreasonable to expect them to do so.

This defence is applied narrowly and requires clear evidence showing the director was genuinely unable to participate in management.

2. All reasonable steps were taken

A director may avoid liability if they can show they took all reasonable steps to ensure that the company:

• paid the relevant tax debt, or
• appointed a voluntary administrator, or
• appointed a small business restructuring practitioner, or
• began winding up

If no reasonable steps were available in the circumstances, that may also support a defence. Simply relying on advisers or other directors is not enough, the focus is on what the director personally did.

3. Reasonably arguable position (limited defence)

For GST and SGC liabilities only, a defence may be available if:

• the company adopted a reasonably arguable position on how the law applied, and
• reasonable care was taken in applying that interpretation.

This defence does not apply to PAYG withholding liabilities and is uncommon in practice.

Why Professional Advice Matters

DPN Defences are technical, time sensitive, ad evidence based. Hybrid DPNs can further complicate matters, particularly where lockdown and non-lockdown liabilities coexist. Directors should obtain advice early to assess whether a genuine defence exists and how best present it to the ATO.

Do you have more questions about our Director Penalty Notices? Read our full guide here

The Importance of Seeking Professional Advice

This article has aimed to provide general information about Director Penalty Notice Defence, however, every company’s exact circumstances are different. We strongly encourage directors seeking to understand their options to respond to or defend a Director Penalty Notice and reduce personal liability exposure to give an insolvency professional likeDissolve to discuss your specific circumstances. Dissolve may even recommend cheaper (or free!) solutions than other insolvency firms.