Director Penalty Notices: Concerns over ATO approach

In a submission dated 9 October 2026, the Business Law Section of the Law Council of Australia (Law Council) has highlighted concerns about the Australian Taxation Office’s administration of Director Penalty Notices (DPNs).

The submission, made to the Tax Ombudsman’s review of the DPN regime, draws on the experience of practitioners across the Law Council’s taxation, insolvency and restructuring, and small and medium enterprise committees.

It raises issues ranging from allegedly incorrect notices and confusing correspondence to difficulties having statutory defences properly considered.

We commend the Law Council for bringing these concerns to the Tax Ombudsman. While directors should be held accountable for their legal obligations, a regime carrying significant personal consequences to business owners and directors must also be administered accurately, consistently and fairly to prevent injustice.

What is a Director Penalty Notice?

The director penalty regime can make directors personally liable for certain unpaid company liabilities, including:

• Pay as you go (PAYG) withholding;
• Goods and services tax (GST); and
• Superannuation guarantee charge (SGC).

Personal liability can arise under the legislation before a DPN is issued. The notice is an important step the ATO must take before commencing recovery of the director penalty against directors of a company.

There are two broad categories of director penalties, commonly described as non-lockdown and lockdown penalties. The difference is critical. A lockdown penalty arises where PAYG withholding and GST is not reported within three months of its due date, or where SGC statements are not lodged by their due date. A non-lockdown penalty arises where the lodgement deadlines are complied with, but where the payment of the liability is not made by the due date.

For a non-lockdown penalty, taking a qualifying step within the applicable 21-day period will usually result in a full remission of the penalty.

For a lockdown penalty, taking the qualifying step within 21-days will not cause a remission of the penalty.

The lesson: even if you will be late on payment, you must ensure your lodgements are on time.

Some of the key takeaways

• Directors may be liable for DPNS if they held office when the company’s tax liabilities arose—or became a director while those liabilities remained unpaid. DPN exposure can persist after a company enters external administration, and the ATO may issue notices and pursue collection later. However, there is a practice within the ATO whereby incorrect notices are being issued even where a director has complied with the 21-day timeframe.
  

• Timely reporting of PAYG withholding debt through Single Touch Payroll (STP) should prevent a “lockdown” DPN, even if the debt is later reported through a BAS. The Law Council submits that the ATO issued lockdown DPNs incorrectly for years, without publicly acknowledging the problem or notifying affected directors, and sometimes pursued proceedings on those notices. It says the issue was typically addressed only after a solicitor became involved and the case was referred to an ATO officer.
  

• DPNs are issued inconsistently: some directors are pursued while others in the same company are not, and directors may receive both lockdown and non-lockdown notices. These approaches can encourage conflicting behaviours, with no clear policy explaining the ATO’s decisions.
  

The treatment of vulnerable directors – coercive control and financial abuse

• A director who was financially abused or coerced may be able to rely on the “other good reason” defence in section 269-35(1) of Schedule 1 to the Taxation Administration Act 1953 (Cth)  if those circumstances made it unreasonable to expect them to participate in managing the company, and they did not participate during the relevant period. However, the Law Council highlights that, practitioners have observed a reluctance from ATO staff to interpret the test in this way. Positive guidance on the topic has been requested in the submission.

Received a DPN? Do not wait for the review

If you have received a DPN:

• Seek legal advice immediately. The relevant 21-day period generally runs from when the notice is posted or otherwise given, not when you read it.
• Check the underlying records. Relevant documents include the notice, company tax lodgements, Single Touch Payroll records, payment records and details of your appointment or resignation.
• Do not assume the lockdown classification is correct. Each liability and reporting period may need separate examination.
• Identify evidence relevant to any defence. Medical records, board minutes, correspondence and evidence of steps taken may be important.
• Do not assume liquidation or restructuring resolves your personal exposure. Lockdown penalties can remain enforceable despite the company entering an insolvency process.
• Even if the deadline appears to have passed, obtain advice rather than assuming there is nothing further to consider.

Speak to Forbes Kirby

A DPN is not simply another company debt letter. It can have serious consequences for your personal financial position, and the appropriate response depends on the notice, the company’s reporting history and your circumstances.

If you have received a Director Penalty Notice, are facing ATO recovery action, or are concerned about your exposure as a current or former director, contact Forbes Kirby promptly to discuss your position and the assistance you need.

Call 08 6325 5700, email hello@forbeskirby.com, or visit our contact page.

This article provides general information only and is not legal advice. Obtain advice specific to your circumstances, particularly where a notice or recovery action carries a deadline.

Source: Law Council of Australia, Business Law Section, ATO’s administration of Director Penalty Notices—submission to the Tax Ombudsman, 9 October 2026.