Navigating lockdown Director Penalty Notices: key considerations



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Explores the relevant considerations directors should make when facing a lockdown DPN.
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Are you paying down a DPN through external administration?

Many of our readers are likely familiar with the concept of Director Penalty Notices (DPN), including the differences between a standard (or a non-lockdown) DPN and a lockdown DPN, and the necessity for a company to appoint a liquidator, administrator or restructuring practitioner when unable to pay the penalties of a non-lockdown DPN. If you wish to learn more about DPNs, click here to head to our DPN category.

Directors who receive lockdown DPNs often find themselves uncertain about their options beyond full debt payment. This article explores the relevant considerations directors should make when facing a lockdown DPN.

Before delving into this issue, let's recap standard (non-lockdown) DPNs and lockdown DPNs.

Non-lockdown DPN

When a company does not remit its tax on time, the director automatically becomes personally liable for the unpaid tax. In fact, a several parallel liability (director's liability) equal that of the Company arises.

The DPN regime enables the ATO to commence recovery action against the director, however it does not itself create the liability.

When a company fails to make tax payments but still reports (such as BAS or Superannuation Guarantee Charge Statement) to the ATO on time, the ATO may issue a non-lockdown DPN.

Upon receiving a non-lockdown DPN, directors have several options, which, if acted upon within 21 days of the DPN, can remit the director penalty. These options include:

  1. Pay the debt
  2. Appoint a voluntary administrator
  3. Appoint a small business restructuring (SBR) practitioner; or
  4. Appoint a liquidator.

Failure to take any of these actions within 21 days results in the non-lockdown DPN converting into a lockdown DPN (see below). Personal liability can only be remitted by paying the debt (i.e. cannot be avoided through appointment of voluntary administrator, restructuring practitioner or liquidator).

Lockdown DPN

When a company fails to remit its tax debt and does not report to the ATO within specified timeframes (see this article), the ATO may issue a lockdown DPN to the director, and the director cannot remit the penalties through appointment of external administrators.

Options for the director facing lockdown penalties

As explained above, the director remains liable for the company's underlying taxation debt until the debt is fully repaid. This is regardless of whether a DPN has been issued by the ATO or not.

When a director receives a lockdown DPN, payment can be made by lump sum, or by instalment if agreed by the ATO. Quite often we see directors failing to repay the debt within 21 days from receiving a lockdown DPN. This may result in the director becoming bankrupt. Subsequently, personal assets, such as a family home, may have to be sold.

The director should note that in such circumstances the company's relevant debts are essentially guaranteed by them under the DPN regime. If the company pays the debt in full, the DPN is remitted. If the company cannot pay in full, the director is liable for the shortfall.

If the company has a viable business when the lockdown DPN is received, directors' options may include:

  • Paying the debt in full using company funds, personal funds, or a combination;
  • Entering into a payment plan with the ATO, if possible.

Restructuring company debts

Directors may also consider appointing a voluntary administrator (VA) or SBR practitioner who can assist in:

  • Identifying tax debts subject to director penalties;
  • Including other creditors in the restructuring process to compromise debts;
  • Generating working capital from the restructuring process to pay down legacy penalty debts and repair the balance sheet;
  • And determine the source of contributions for the restructuring (e.g., future trading profit, director's personal funds, third-party funds).

Directors should understand that distributions from a restructuring process may or may not reduce director penalties, as the ATO applies payments to the oldest debt first.

An example

Consider Company A that owes the ATO $200,000 and the directors receive a lockdown DPN of $80,000. Let's also assume that the company accumulated $40,000 tax debt each year from FY19.. If the directors offer 40 cents in the dollar (i.e. $80,000 return to the ATO) through an SBR, the payments will apply to unpaid tax accrued during FY19 and FY20. Therefore, the distribution's impact on the DPN varies depending on which periods the DPN relates to:

Tax debt by period

SBR distribution's impact on amount subject to DPN






Scenario A



Reduced in full

Scenario B



Reduced by $40,000

Scenario C



no impact

As can be seen from above analysis: in scenario A, the SBR distribution reduces the DPN by $80,000; in scenario B, by $40,000, while in scenario C, it does not reduce the DPN balance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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