Director Penalty Notices: the 21-day rule explained

What a DPN is

A Director Penalty Notice (DPN) is a formal notification issued by the Commissioner of Taxation. It holds a director personally responsible for unpaid amounts owed by their company. These amounts relate to PAYG withholding, GST, or Superannuation Guarantee Charge.

DPNs are created under the authority of Division 269 of Schedule 1 to the Taxation Administration Act 1953. This legislation outlines the process and conditions for issuing these notices.

There are two distinct categories of DPNs. A ‘non-lockdown’ DPN applies when the company has met its lodgement obligations but has failed to pay the amounts due. A ‘lockdown’ DPN is issued when the company has not met its lodgement obligations.

The 21-day rule

A director facing a Director Penalty Notice (DPN) generally has a limited timeframe to address the notice and avoid personal liability. From the date the DPN is given, a director has 21 days to take action. This period is crucial for determining options to remit the penalty. Directors should consider their director duties self-check to ensure compliance.

The steps a director can take to avoid personal liability depend on the type of DPN issued. For a non-lockdown DPN, directors have several options, including:

• Paying the debt
• Appointing a voluntary administrator
• Appointing a small business restructuring practitioner
• Beginning to wind up the company

However, for a lockdown DPN – which arises from lodgements more than 3 months late or unpaid Superannuation Guarantee (SG) beyond the SGC due date – the sole option to avoid liability is paying the debt. Administration or winding up the company will not be sufficient to remit the penalty in these circumstances.

When directors become personally liable

Directors can become personally liable for penalties if a company fails to meet its obligations relating to pay as you go (PAYG) withholding, goods and services tax (GST), and superannuation guarantee (SG) charge. This liability arises when the company has not taken steps to meet these obligations. The point at which a director becomes personally liable is the day after the 21-day period expires. It is crucial for directors to ensure the company is fulfilling its obligations to avoid this personal liability. You can use the director ID check to verify director details.

New directors also face potential personal liability. Within 30 days of their appointment, they are required to confirm whether there are any unmet PAYG, GST, or SG obligations. Failure to do so can expose them to penalties. This responsibility highlights the importance of due diligence when accepting a director role.

Resigning as a director does not absolve a person from liability for amounts that were due during their time as a director. Obligations existing prior to resignation remain the responsibility of the former director until they are met.

How directors should manage exposure

Directors should proactively manage potential exposure to Director Penalty Notices. Ensuring Business Activity Statement (BAS) and Superannuation Guarantee (SG) obligations are lodged on time is crucial, even when the business faces cash flow difficulties. Late lodgement can escalate the severity of a Director Penalty Notice.

Regular monitoring of the company’s Pay As You Go Withholding (PAYG-W), Goods and Services Tax (GST), and Superannuation Guarantee (SG) status is recommended. This should occur monthly, rather than solely at BAS lodgement time.

If a company is approaching insolvency, directors should seek specialist advice at an early stage. Taking action such as voluntary administration before a Director Penalty Notice is issued can help preserve options. Directors should also retain records of payment plans agreed with the ATO and any disputed amounts.