Director Penalty Notices are being reviewed: Watch this space

What directors need to know about the ATO DPN review

The Tax Ombudsman is reviewing the administration of Director Penalty Notices (DPNs) by the Australian Tax Office (ATO).

As the Tax Ombudsman wraps up its request for feedback, interest is growing in what action may follow.

The review comes after the ATO issued more than 84,000 DPNs to the directors of approximately 64,000 companies in the 2024-2025 financial year alone.

This was an increase of 136% on the prior financial year and has fuelled growing debate about its effects on directors at a time when many business leaders are already questioning whether the risks attached to directorships are becoming disproportionate to the benefits. 

What is the purpose of DPNs and why do they need a review?

Director Penalty Notices were created as a tool for the ATO to help streamline the administration and collection of company debts that form part of a director’s liability – namely GST, PAYG withholding and the superannuation guarantee.

The director penalty regime itself is not under review. Rather, the Tax Ombudsman is examining how the ATO administers and applies the regime in practice. For example, some directors may be unaware of the extent of their exposure, or find themselves facing significant personal liability due to illness, hardship or other circumstances that limit their involvement in the business. In these situations, receiving a DPN can come as a considerable shock. 

Drawing on complaints received by the Tax Ombudsman and feedback from stakeholders, the review will explore whether the current approach is striking the right balance between director accountability and fair treatment.

According to the Tax Ombudsman, the review will examine whether the ATO:

1. provides appropriate information to directors, including about actions available to them
2. is appropriate and consistent in considering the circumstances of the affected directors
3. considers factors such as vulnerability, coercive directorship and financial abuse.

Potential outcomes of the DPN review

While we aren't privy to the inner workings of the DPN regime, at RSM we have seen the effects of DPNs firsthand.

In some cases, DPNs have been issued years after a business entered liquidation, leaving former owners facing new liabilities long after the business itself ceases to exist.

In other cases, uncertainty around existing or potential DPN exposure has complicated restructuring efforts, making it more difficult for financially distressed businesses to pursue a viable path forward.

We have also seen situations involving vulnerable directors, coercive directorships and financial abuse, where individuals have found themselves exposed to significant liabilities despite having little involvement in the management of the business. It is encouraging that the review will examine whether additional safeguards may be needed for people in these circumstances.

Another area likely to attract attention is the impact of lockdown DPNs. While the rules are designed to encourage timely lodgement and prevent directors avoiding their obligations, a director who lodges too late can become personally liable for the debt with very limited recourse. In some cases, even where the underlying business is viable and capable of being restructured, the director's personal liability can persist.

This creates a difficult dynamic. Rather than encouraging early engagement with restructuring options, some directors may feel they have run out of alternatives which reduces the incentive to seek turnaround advice at a point when a successful restructure could still be achievable.

When will the DPN review be published?

While the review is still in its early stages, any measures that improve communication and transparency around DPNs would be a positive outcome.

One area that warrants consideration is whether directors should have greater access to dedicated guidance if they have received, or may receive, a lockdown DPN. For many business owners, understanding the extent of their exposure and the interaction between it and a proposed restructuring can be challenging. Earlier engagement with the ATO, and clearer legislation or advice as to whether lockdown provisions could be enforced should a restructure or wind down path be taken, may help directors make more informed decisions and feel empowered to proactively seek professional advice at an early stage.

The final report is not expected until April 2027, so it may be some time before any recommendations emerge. However, given the increasing use of DPNs and the significant consequences they can have for directors, the review results are likely to be closely watched by business owners, advisers and insolvency professionals alike.

It is important to remember that this review is very unlikely to affect any obligations to pay DPN-related debt, making it important to get sound professional advice as early as possible to consider options.  

If you have received a Director Penalty Notice, or are concerned about receiving one, please contact the Restructuring and Recovery team at your local RSM office.