Thinking | 9 March 2022

Director penalty notices: payment arrangements no longer part of the plan

Key takeaway

A director can no longer enter into a payment arrangement to avoid personal liability for tax debts that are the subject of a Non-Lockdown Director Penalty Notice.

Director Penalty Notices

While the ATO put most overdue tax collection on hold during the COVID-19 pandemic, it has recently recommenced some collection activity. This includes the issuing of Director Penalty Notices (DPN).

Directors become personally liable for a penalty equal to the value of certain company tax obligations, including superannuation, PAYG withholding and GST, if they are not paid when due. In order to commence proceedings to collect these amounts from a director, the ATO must first issue the director with a DPN.

The options available to a director when they receive a DPN depends on the type of DPN. There are two types of DPNs:

  1. A ‘Non-Lockdown’ DPN, which can be issued where:
      1. a company has lodged business activity statements (BAS) and instalment activity statements within three months of the due date; and
      2. has lodged superannuation guarantee charge (SGC) statements within one month and 28 days after the end of the quarter that contribution relates to; but
      3. has not paid the relevant amounts owed.
  2. A ‘Lockdown’ DPN, which can be issued where a company has not lodged their BAS or SGC statements within the above timeframes and not paid the relevant amounts.

The only option available to a recipient of a Lockdown DPN is to pay the penalty or rely on one of the relevant statutory defences, such as director illness, if available.  However, recipients of ‘Non-Lockdown’ DPNs can avail themselves of one of the options set out in the notice within 21 days to avoid the penalty.

Recent changes to Non-Lockdown DPNs: directors can no longer avoid a penalty by causing the company to enter into a payment plan

Prior to the pandemic, the options available to directors in a Non-Lockdown DPN were:

  1. the company’s tax liability is discharged;
  2. the company went into administration;
  3. the company went into liquidation; or
  4. the company entered into an arrangement under section 255-15 in Schedule 1 to the Taxation Administration Act 1953 (Cth) (ie a payment arrangement).

We have been provided with a Non-Lockdown DPN issued within the last few weeks. The options available to a director within the 21 days are now:

  1. the company complies with its obligation to pay the unpaid amount to the ATO;
  2. the company goes into administration;
  3. the company appoints a small business restructuring practitioner (SBRP); or
  4. the company goes into liquidation.

The SBRP option has been included given the introduction of the SBRP regime on 1 January 2021.

Noticeably missing is the option for the company to enter into a payment arrangement. Significantly, this means that directors can longer avoid personal liability for a penalty under a Non-Lockdown DPN by causing the company to enter into a payment arrangement in relation to the outstanding liability within the 21 days.

The deletion appears to be in line with the Full Court of the Federal Court’s decision in Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy,[1] that a payment arrangement does not cause a tax debt which was due and payable to cease to be due and payable.

The removal of the payment arrangement option will inevitably mean that more directors who receive DPNs will put their companies into administration or liquidation or appoint a SBRP.

Hall & Wilcox has a wealth of experience, industry knowledge and strong technical skills when it comes to issues of restructring, director duties and insolvency. If you have received a DPN, or would like advice about the areas discussed in this alert please contact our team.


[1] [2020] FCAFC 5.

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