Director Penalty Notices: Every Defence Available and How to Raise It
Receiving a Director Penalty Notice from the ATO creates personal liability almost automatically. But almost is the operative word. The Taxation Administration Act 1953 (Cth) contains specific statutory defences that, if properly established, mean you are not personally liable despite the notice. Most directors who receive a DPN do not know these defences exist. Fewer still know what evidence is required to make them out.
The 21-day window is your best option. But the defences are worth knowing.
First: the Lockdown Distinction Still Controls Everything
Before examining the defences, the lockdown versus non-lockdown classification matters here too. If you have received a lockdown DPN, your options are already significantly narrower. The defences below apply in both cases, but for a lockdown DPN the defences are often the only realistic avenue if the 21-day window for non-lockdown remission has already closed or the debt is not payable within 21 days. Identify which type you have before proceeding.
The Statutory Defences Under Division 269
Division 269 of Schedule 1 to the Taxation Administration Act 1953 (Cth) provides four recognised defences to a director penalty claim. Each has its own evidentiary requirements, and each must be properly raised, not simply asserted.
1. You were not a director at the time the liability arose
This seems obvious, but the timing analysis is critical. The ATO’s right to pursue you personally attaches in relation to the periods during which you were actually a director. If you became a director after the relevant withholding or superannuation guarantee debts arose, you are not personally liable for those amounts, subject to the 30-day grace period for incoming directors noted below.
The 30-day rule: a newly appointed director has 30 days after their appointment to cause the company to comply with or enter an appropriate arrangement before they become liable for pre-existing PAYG and superannuation debts. If you acted within that period, or if the relevant liability arose entirely after your appointment, this defence may be available.
2. You took all reasonable steps to ensure the company complied or to appoint a voluntary administrator or liquidator
This is the most commonly attempted but hardest to make out of the defences. It requires showing that, during the relevant period, you took all reasonable steps to cause the company to pay the amounts owed, or to have an administrator or liquidator appointed. A director who attended board meetings, asked questions about the tax position, and was told by management that payments were being made may have some basis for this defence, but courts look hard at what you actually knew, what you actually did, and whether any steps you took were genuinely reasonable rather than perfunctory.
Evidence required: records of board meetings, correspondence with accountants or the ATO, records of any payments made or attempted, and any communications showing you actively engaged with the company’s tax compliance position rather than passively ignoring it.
3. Illness or other good reason meant you did not take part in management and could not reasonably have been expected to
This defence is available where, for all or part of the relevant period, you were physically or mentally incapacitated in a way that prevented you from participating in management and it was not reasonable to expect you to do so despite that incapacity. It is not a general illness defence — it requires showing both that the incapacity existed and that it genuinely prevented participation in management. A director who was unwell but still attended board meetings, received financial reports, or executed documents is unlikely to succeed.
Medical evidence contemporaneous with the period in question is essential. A retrospective doctor’s letter stating that a director was ill will carry less weight than medical records from the period itself.
4. Procedural defect in the notice itself
A DPN must meet specific formal requirements under the Taxation Administration Act. Defects that may invalidate a notice include service to an incorrect address, insufficient particulars identifying the relevant tax type and period, or errors in calculating the amount claimed. This defence requires close reading of the notice against the statutory requirements, and legal advice on whether any identified defect is sufficiently material to be raised.
The ATO’s notice must be posted to your address as recorded with ASIC. A director who has allowed their ASIC address to become outdated may find that the notice was validly served even if they never received it, since service on the ASIC-registered address is deemed effective. This cuts both ways.
What Happens If You Are Jointly Liable With Other Directors
Where a company has multiple directors, the ATO can pursue any one director for the full amount and leave it to the directors to apportion liability between themselves. This means you can be held responsible for the entire debt even if you believe another director was more responsible for the non-payment. Any apportionment claim against the other director is a separate, subsequent matter — it does not reduce your immediate exposure to the ATO.
Challenging the Underlying Debt
If you believe the underlying tax debt itself is incorrect or was calculated incorrectly, disputing the debt does not automatically suspend the DPN process. The ATO and the courts treat the DPN regime as separate from the tax assessment regime. However, a genuine dispute about whether the underlying liability exists or its amount may provide grounds to approach the ATO for deferral while the dispute is resolved, or to challenge the notice in court proceedings. This approach requires careful management and legal advice, since it does not stop the 21-day clock on non-lockdown defences.
The right defence depends on the specific facts of your appointment, conduct, and timeline.
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Frequently Asked Questions
Q: Can I defend a DPN by arguing I did not know about the unpaid taxes?
A: Ignorance of the company’s tax position is generally not a standalone defence. Courts expect directors to inform themselves of the company’s financial and tax compliance position. However, where a director was genuinely not involved in management due to illness or incapacity, the illness defence may apply. Mere failure to inquire is unlikely to be sufficient.
Q: Does resigning as a director before the DPN is issued protect me?
A: No. If you were a director during the period when the relevant PAYG withholding or superannuation obligations accrued, the ATO can pursue you for those amounts even after your resignation. Resignation does not retrospectively remove liability for periods when you were a director.
Q: What evidence do I need to run the ‘took all reasonable steps’ defence?
A: Board meeting minutes showing you raised the company’s tax position, correspondence with accountants or the ATO, evidence of any payments made or agreed, and records of any steps you took to cause compliance during the relevant period. The evidence must relate to what you actually did during the relevant period, not what you say you were generally aware of.
Q: Can I challenge a DPN after the 21-day window has closed?
A: You can still raise the defences discussed here after the 21 days have expired. The 21-day window applies to the non-lockdown remission options (pay, appoint administrator, etc.). The statutory defences are available as a matter of law regardless of whether the window has closed. However, the sooner you raise them, the better your practical position.
Q: What if the DPN was sent to the wrong address?
A: The ATO is required to serve the notice on your address as recorded with ASIC. If your ASIC address was correct and the notice was sent there, service is generally deemed effective even if you did not actually receive it. If the ASIC address was wrong at the time of posting, or the notice was sent to an address other than the ASIC-registered address, there may be a defect argument, but this requires close analysis of the specific facts.
Q: Is it worth fighting a DPN in court?
A: That depends on the strength of the available defence and the amount of the debt. Where a genuine statutory defence exists and can be established on the evidence, contesting the DPN may be the right commercial decision. We assess the merits honestly and will tell you clearly if the available evidence does not support a viable defence, rather than encouraging expensive litigation with poor prospects.
