What is a director penalty?
As a company director, you are responsible for ensuring that the company's tax and superannuation obligations are reported and paid on time.
If your company doesn't pay certain liabilities by the due date, we can recover these amounts from you personally as a current or former company director.
You may become personally liable for your company's unpaid amounts of:
The amounts that you are personally liable for are called 'director penalties'. We can recover the penalty amounts from you 21 days after we issue you a director penalty notice (DPN).
A director penalty is a parallel liability
A director penalty is a parallel liability. This means the director's liability mirrors the company’s liability, so any payments made to either the company’s liability or the director's liability will reduce the liability for both equally.
If the company has multiple directors, each director is likely to owe the same amount. This is because the company's debt and the director penalty liability are parallel in nature.
When we recover director penalties, we may do so equally from all the directors. We may also consider the individual circumstances of each director.
Example: parallel liabilities
Taylor and Cam are directors of ABC Pty Ltd, which is required to pay PAYG withholding to the ATO on a quarterly basis. For the January to March quarter, the company was required to pay $4,000 PAYG withholding to the ATO but failed to do so by the due date.
If ABC Pty Ltd doesn't pay its PAYG withholding liability, we will issue Taylor and Cam each with a DPN. Once 21 days have passed, we may then seek to recover director penalties of $4,000 from either Taylor or Cam, or both.
When Taylor pays $1,000 against their director penalty liability, both the company's liability and Cam's director penalty liability will be reduced by $1,000 as they are parallel liabilities.
When the company pays $1,000 against its PAYG withholding liability, both Taylor and Cam’s director penalty liabilities will be reduced by $1,000.
End of exampleDirector penalty notices
A DPN is a notice we must give you first before we can take action to recover director penalties. The notice outlines the unpaid amounts that you are liable for and remission options available to you.
If you are a current director, we will generally send the DPN to the address registered with the Australian Securities & Investment Commission (ASIC). If there is no address registered with ASIC, we will use the address last known to us. It's important to keep your address details up to date.
The notice will outline options you can take to remit the penalty. You have 21 days to take one of those options. The 21 days starts on the day we post the DPN or leave the DPN at the address registered with ASIC.
If the penalty is not remitted within 21 days of the notice, we may take action against you to recover the director penalty amounts. However, you will not need to pay the director penalty amounts if you lodge a successful defence.
Example: director penalty notice
Taylor and Cam are directors of ABC Pty Ltd, which is required to pay PAYG withholding on a quarterly basis. For the January to March quarter, the company was required to pay $4,000 PAYG withholding to the ATO but failed to do so by the due date.
Taylor and Cam both have a $4,000 director penalty liability.
We issue DPNs to both Taylor and Cam.
Taylor and Cam don't have the penalty remitted within 21 days.
After 21 days, we may take action to recover the penalty.
End of exampleHow penalty liabilities apply in certain situations
Penalty liabilities for new directors of a company
Before you become a director of an existing company, check if the company has any unpaid or unreported PAYG withholding, GST or SGC liabilities. You may be personally liable for unpaid amounts that were due prior to your appointment.
As a new director, you will not be liable for a director penalty that was due before your appointment if, within 30 days of your appointment, you ensure the company does one of the following:
- pays the amount outstanding in full
- appoints an administrator to the company
- appoints a small business restructuring practitioner to the company
- winds up the company (within the meaning of the Corporations Act 2001).
If you resign as a company director within the 30-day period, you may still be liable for the company's unpaid PAYG withholding, GST or SGC liabilities that were due before your appointment.
Example: appointment of a new director
XYZ Pty Ltd is required to pay PAYG withholding on a quarterly basis. For the January to March quarter, the company was required to pay $4,000 PAYG withholding to the ATO but failed to do so by the due date.
On 2 June 2024, Marley became a director of the company. Marley has 30 days from the date of his appointment to ensure that the company:
- pays the amount outstanding in full
- appoints a voluntary administrator to the company
- appoints a small business restructuring practitioner to the company, or
- winds up the company (within the meaning of the Corporations Act 2001).
If Marley fails to ensure the company does at least one of the above within 30 days of the date of his appointment, Marley will become liable for the unpaid PAYG withholding.
On 25 June 2024, Marley arranges for the company to pay the outstanding amount in full. Marley is not liable for director penalties because he ensured the company paid the outstanding PAYG withholding in full within the 30-day window following his appointment.
End of exampleIf you are no longer a director
If you resign as a director of the company, you can still be liable for director penalties relating to company liabilities that:
- were due before the date of your resignation, or
- became due after your resignation but relate to a period when you were still a director. This includes
- PAYG withholding liabilities, if the first PAYG withholding event in that reporting period occurred before you resigned
- GST liabilities (including LCT and WET), if the reporting period ended before you resigned
- SGC liabilities, if the reporting period ended before you resigned.
If you are liable for a director penalty, you remain liable after the company is deregistered.
Example: resigning as director
Gabrielle is a director of 123 Pty Ltd, which lodges BAS quarterly. The last day of the first quarterly reporting period is on 30 September and the BAS is due on 28 October.
On 1 October, Gabrielle resigns as director of 123 Pty Ltd.
123 Pty Ltd lodges its BAS on 28 October, resulting in a $20,000 GST liability for the first quarter that it does not pay.
Gabrielle is liable for a $20,000 director penalty and we issue them with a DPN.
End of exampleWhen we estimate unpaid and overdue amounts
If the company fails to report PAYG withholding, GST or SGC obligations by the due date, we may make a reasonable estimate of the unpaid and overdue amounts.
Director penalties can apply to these estimated liabilities.
The estimated liabilities are due and payable by the company on the day we give the company the estimated notice.
Example: ATO estimate of unpaid PAYG withholding
Taylor and Cam are directors of ABC Pty Ltd, which is required to pay PAYG withholding on a quarterly basis. For the 2024 January to March quarter, the company was required to pay $4,000 PAYG withholding to the ATO but failed to do so by the due date, 28 April 2024.
On 21 August 2024, we estimated the unpaid amount of PAYG withholding for the January to March quarter and issued the estimate notice to the company that same day. As directors, both Taylor and Cam are personally liable for a director penalty equal to the unpaid amount of the estimate.
On 21 September 2024, a DPN was issued to Taylor and Cam separately based on the estimated amount of PAYG withholding.
End of example
Example: ATO estimate of unpaid GST
Taylor and Cam are directors of ABC Pty Ltd, which collected GST on sales on a monthly basis. For the month of April 2024, the company was required to report and pay GST collected during the month by 21 May 2024 but failed to do so.
On 21 September 2024, we estimated the unpaid amount of GST for April 2024 and issued notice of the estimate to the company that same day. At the end of this day, both Taylor and Cam are personally liable for a director penalty equal to the unpaid amount of the estimate.
On 21 October 2024, a DPN was issued to Taylor and Cam separately based on the estimated amount of GST.
End of exampleRemission of the director penalty
In certain circumstances a director penalty can be remitted. If it's remitted you will no longer need to pay the liability.
PAYG withholding and GST
The options to remit a director penalty depend on when the PAYG withholding and net GST payable was reported to us.
Liabilities reported within 3 months of the due date
If the unpaid amount of PAYG withholding or GST is reported within 3 months of the due date (or, in the case of new directors, within 3 months of the date of their appointment), the penalty can be remitted within 21 days of the date the notice is issued, if either:
- the company pays the amount outstanding in full
- an administrator is appointed to the company
- a small business restructuring practitioner is appointed to the company
- the company begins to be wound up (within the meaning of the Corporations Act 2001).
Liabilities reported more than 3 months after the due date
The director penalty can only be remitted by paying the corresponding company liability in full, for the unpaid amount of PAYG withholding or GST, if:
- it is reported more than 3 months after the due date (or, in the case of new directors, 3 months or more after the date of their appointment), or
- it remains unreported after 3 months.
Estimated amounts of PAYG withholding and GST are treated as amounts that were never reported.
Example: remission of PAYG withholding director penalties
Taylor and Cam are directors of ABC Pty Ltd, which is required to pay PAYG withholding and GST on a quarterly basis. For the 2024 January to March quarter, the company reported $4,000 in PAYG withholding within 3 months of the due date but did not pay. In addition, the company reported $0 in GST.
On 21 October, we estimated $10,000 in unpaid GST and issued notice of the estimate to the company that same day.
On 21 November 2024, DPNs were issued to Taylor and Cam based on the $4,000 unpaid PAYG withholding liability and the $10,000 estimated GST liability.
Taylor and Cam choose to wind up the company within 21 days of being given the DPNs. Of their director penalty liabilities:
- the $4,000 related to the PAYG withholding liability is remitted
- the $10,000 GST liability can only be remitted if the company pays the debt.
SGC amounts
For SGC, the options to remit a director penalty depend on when the SGC amounts are reported to us.
Liabilities reported by the SGC due date
If the SGC amounts are reported by the SGC due date, the penalty can be remitted within 21 days of the date the notice being issued, if either:
- the company pays the amount outstanding in full
- an administrator is appointed to the company
- a small business restructuring practitioner is appointed to the company
- the company begins to be wound up (within the meaning of the Corporations Act 2001).
Liabilities reported after the SGC due date
If the SGC amounts are reported after the SGC due date or are never reported, the only way to remit the director penalty is to pay the company liability in full.
Estimated amounts of SGC are treated as amounts that were never reported.
Example: remission of SGC liabilities
Taylor and Cam are directors of ABC Pty Ltd, which has an SGC liability that it failed to pay or report to the ATO by the SGC due date.
Taylor and Cam are liable for the unpaid SGC and we issue them with DPNs.
The only way Taylor and Cam can remit the director penalty is to pay the company liability in full within 21 days of the date the notices were given to them. This is because the company did not report the SGC amounts by the SGC due date.
End of exampleHow to lodge a defence to a director penalty notice
The director penalty regime outlines circumstances in which a director is not liable for director penalties.
You will have a defence and not be liable for a director penalty if, for the entire period since the company’s obligation to pay the liability first arose:
- You didn't take part (and it would have been unreasonable to expect you to take part) in the management of the company at any time during the relevant period because of illness or other acceptable reason, or
- You took all reasonable steps, unless there were no reasonable steps you could have taken, to ensure that one of the following happened
- For unpaid SGC or GST liabilities only, the company.
The courts have stated that:
- As a director, it is not a defence if you relied on others (including fellow directors and professional advisers) to ensure your obligation was met (Deputy Commissioner of Taxation v Clark (2003) 57 NSWLR 113).
- The combined defences must cover the whole of the period between when the obligation arose, and the expiry of the notice (Canty v Deputy Commissioner of Taxation [2005] NSWCA 84 – for more information see also DCT v George [2002] NSWCA 33).
- Resigning as a director does not remove your obligation or alleviate the penalty (Canty v Deputy Commissioner of Taxation [2005] NSWCA 84 at [25]).
- A director’s non-participation in the management of the company will usually involve a breach of the duty, whether the director is aware of this or not (DCT v Lesley Frances Robertson [2009] NSWSC 597).
Review rights and when to submit your defence
You can ask us to consider your director penalty defence at any time, or you can raise it as a defence if we take legal action.
If we decide that you haven't met the requirements for a successful defence, you can get our decision reviewed by the courts under the Administrative Decisions (Judicial Review) Act 1977 if you lodge the defence within 60 days of:
- receiving a garnishee notice, or
- receiving something in writing from the ATO that shows we have recovered some of the penalty.
We can also consider your defence outside the 60-day period. However, our decision will not be reviewable by the courts under the Administrative Decisions (Judicial Review) Act 1977.
How to submit your defence
A DPN defence needs to be submitted to the Commissioner in writing, clearly articulating which of the 3 defences you are seeking to rely on.
Once you have completed your application, you can either:
- ask your tax agent to lodge the application through Online services for agents, or
- mail it to
Attention: Technical Leadership and Guidance
AUSTRALIAN TAXATION OFFICE
PO BOX 327
ALBURY NSW 2640
If we consider your defence meets the criteria under the law, you will not have to pay the director penalty liability. If you think you have a valid defence, contact us as soon as possible.
If you're finding it hard to pay because of personal circumstances, there are support options available.
If you don't pay
We can recover director penalties by:
- offsetting any of your tax refunds or credits against the director penalties
- taking firmer action
- taking legal action.