Directors often have some understanding that they can become liable for their company’s debts – for instance for allowing a company to incur ‘unpayable’ debts. However, there are some less well understood and, arguably, nastier tax provisions, that make directors personally liable for certain of their company’s tax related liabilities. This is under the so called ‘Directors Penalty Notice (or ‘DPN‘) provisions in Div 269 of the TAA53. It is beyond the scope of this article to chart all the ways in which these provisions are nasty, and what directors need to be wary of, on becoming a director of a company, but I will go through some of these.

1.  The scope of company liability has grown to be quite a serious burden for director personal liability. The provisions cover the following company liabilities (under s269-10(1)).

  • Money payable to the Commissioner, under the withholding provisions in Div 16-B of the TAA53. For decades this has included a liability to pass on, to the Commissioner, money withheld, from remuneration the company paid to its workers, on account of their own tax liability. But this now includes other company payment obligations under Div 16-B, if the company has received ‘alienated personal services income’ or has paid ‘non-cash benefits’ (see s269-10(1), items 1,2 & 3). The rationale for making directors liable, was that it was really workers’ money, that had been misapplied, if not paid to the Commissioner, for the purpose it was withheld.
  • Directors’ personal liability was expanded, in 2012, to include the company’s ‘Superannuation Guarantee Charge’ (SGC) liability – which arises each quarter, to the extent that the company has not met the requirements of the SGC Act (namely to pay the correct 10.5% contribution, for the correct workers, to the correct superannuation fund). This is under s269-10(1), item 5. The rationale for this was one step more dilute, in that the SGC tax due to be paid, can be claimed (if paid) by those workers, and paid into their nominated superannuation fund. Again, directors’ personal liability was protecting workers’ entitlements.
  • From 2020, this was expanded to include assessed GST liabilities, that arise at the end of the the relevant ‘tax period’ (usually the end of each month or quarter). However, it also includes the company’s GST instalment liabilities, due at the end of the relevant quarter (if the company is not lodging monthly or quarterly returns (see s269-10(1), items 6 & 7). The rationale for making directors liable for GST is not immediately obvious. You would be forgiven for thinking that they might as well make directors personally liable for the company’s income tax. The rationale here (probably) is that the taxpayer doesn’t bear the cost of this indirect tax, but is just a collection mechanism, for others who’ve born the cost of the tax (by paying for the relevant goods or services).
  • Additionally, the Commissioner can make estimates of these company liabilities, and collect those amounts, from directors’ personal assets (s269-10(4)).

2.  Perhaps the most burdensome aspect of these provisions is the wide range of directors affected.

  • This in includes those who were directors at the time the tax liability crystallised (eg. when the company withheld money from wages; and for SGC when the quarter ended, without the required superannuation contributions being made) and not later, when the crystallised liability became due (s269-15(1)).
  • This also includes directors (from time to time) after this ‘crystallising’ date – including ‘new’ directors, who were appointed after, after the date the company’s liability ‘crystallised’ and after the liability became due (s269-15(1)).
  • ‘New directors’ get a little latitude (under s269-20(3). First, to be liable, the must be appointed after the ‘due day’ (being appointed after the earlier date on which the company’s liability ‘crystallises’  will not result in liability). Also, they are given 30 days, in which to take a limited range of preventative action.

3.  Before the Commissioner can collect an amount, from directors personally (called a ‘Penalty’ in s269-20) he must issue the director a ‘Notice’ under s269-25(1) (hence the name ‘Directors Penalty Notice’ provisions). This might sound kind, but the nastiness continues.

  • First, the notice period is short – just 21 days (which plays out in various ways – some of which I mention below).
  • Second, a director can still be liable, despite never receiving the notice. Section 269-50 allows the Commissioner to serve the notice by posting it to an address, from ASIC, that appears to the director’s residence of place of business. Many’s the case where the director either never got the notice or got it after the 21 days. Even a 10 or 15 day delay can severely prejudice the options available.

4.  There are a limited range of things directors can do, to avoid personal liability. The key objective of these DPN provisions is get the directors, to address the company’s unpaid tax-related liabilities, either by getting the company to pay them, by motivating the directors to promptly place the company into insolvent administration of various types.

  • So the first option is to get the company to pay its underlying tax liability but in most cases, the company won’t have the money. It might press directors to find alternative funding, but this is of limited use.
  • The other main option is for the director(s) to appoint an administrator (s436A, s436B or s436C of the Corporations Act) or a small business restricting practitioner (under s453B of that Act) within that 21 days. The other option is that ‘the ‘company begins to be wound up (within the meaning of the Corporations Act)’. The problem with this is, I understand, that it is not possible to hit that statutory milestone, within 21 days (making it a non-option).
  • There are some ‘defences’ that bear on this.
    • The first is that the director took ‘all reasonable steps’ to achieve one of the above exclusions to liability (for instance, if that director battled the other directors to put the company in insolvent administration, but they resisted (perhaps because they still thought the company could trade its way out under an instalment arrangement). This is under s269-35(2)(a).
    • Another is that there were ‘no reasonable steps’ the director could have taken. This might be applicable to the statutory impossibility mentioned above (except that the lesser forms of insolvent administration would have to be tried first).
    • The last defence is that the director did not ‘take part in the management’ of the company because of ‘illness or … some other good reason’. It is also enough that it would be ‘unreasonable’ to expect the director to take part in the management of the company, when the person was a director and the director had an obligation to pay the company’s tax-related liabilities. For on-going unpaid tax liabilities, it might be wise for the director to retire from being a director, before the illness, or other good reason, was over. It is rare to see someone successfully using a defence.

5.  Another onerous facet of these provisions is what’s called ‘lock-down’ DPN liabilities. These arise when the company has let more than 3 months go by, without filing the relevant return, or notice, advising the Commissioner of its liability (see s269-30). This takes away the option a director would otherwise have, to avoid personal liability, by putting the company into insolvent administration (or using all reasonable steps) before the 21 days was up.

Problem for New Directors for Director Penalty Notices

Directors who agree to be appointed to a company may have little information about the company and its tax affairs prior to their appointment. This is a significant risk. If the company has outstanding tax lodgements or unpaid tax and superannuation, the newly appointed director has 30 days from the date of their appointment to do one of the following:

  • Cause the company to pay the outstanding tax or superannuation (which he or she is unlikely to be able to effect – being new).
  • Place the company into voluntary administration or liquidation or appoint a Small Business Restructuring Practitioner. Of course, this will not be available, if returns are 3 months late and it’s a ‘lock-down’ notice. Often returns can be three months late. This will typically be so, if a company is audited for SGC compliance, and some workers were found to be covered by the SGC Act. The SGC returns for each of the quarters audited, are likely to be more than 3 months overdue.

So, what can the New Director do? Just resigning, as a director, within 30 days, is not an option. Once you become a director, the only option might be to get the company to pay its debts (if it’s a ‘lock-down’ obligation). The only thing that director could do is rely on defences – such as ‘taking all reasonable steps’.

How Can Accountants and Lawyers Help?

The long and the short of this, is that a person should not become a director (in the first place) without examining the company’s tax position – and compliance with all DPN liabilities.

Lawyers and accountants ought to be trusted advisors and we ought care for our clients by being aware of these risks and giving them preventative advice, about how to proceed (viz: do your ‘due diligence’ first, before agreeing to be a director)


There will be multiple lawyers and accountants in a position to discharge these duties and from whom clients can receive advice, and, where applicable, provide the insolvent administration services.

Without attempting to give any advantage, I do acknowledge that this article was prompted by a news email put out by the insolvency practitioners of Pitcher Partners (Mr Andrew Yeo –  +61 3 8610 5190).



[Tax Month – November 2022 – Previous Month, 20.11.22]