Defending Director Penalty Notices: when ‘reasonable steps’ are not enough

The Australian Taxation Office (ATO) is increasingly using Director Penalty Notices (DPNs) to pursue directors personally for unpaid company tax and superannuation liabilities. During the 2024-25 financial year, the ATO issued more than 84,000 DPNs to directors of approximately 64,000 companies.

These figures demonstrate that DPNs are now a significant component of the ATO's debt recovery activity. Under the director penalty regime, directors may become personally liable for certain unpaid company tax liabilities and superannuation guarantee charge (SGC) liabilities. Importantly, that personal liability can arise before a DPN is issued. The DPN is simply the notice the Commissioner must provide before commencing recovery action against a director personally.

A director who receives a Director Penalty Notice (DPN) must act immediately, as there is only a 21-day window within which steps can be taken to address the notice. If no action is taken within that period, or if the DPN is a lockdown DPN (discussed further below), the available options become significantly more limited. However, statutory defences may be available if the ATO seeks to enforce the penalty, although they can be difficult to establish. Whether a defence applies will depend on the director's circumstances and the taxation obligation that gave rise to the penalty.

The recent Federal Court decision in Ostwald v Commissioner of Taxation [2026] FCA 868 (Ostwald) highlights the significant challenges directors face when attempting to rely on the statutory defences available under the regime. Despite taking extensive steps to improve the company's financial position and continue its operations, the directors were unsuccessful in challenging the Commissioner's rejection of their "all reasonable steps" defence.

How does a Director Penalty Notice work?

Directors are responsible for ensuring their company pays and reports certain taxation liabilities, including:

• Pay As You Go (PAYG) withholding amounts;

• Goods and Services Tax (GST) liabilities; and

• Superannuation Guarantee Charge (SGC) liabilities.

If a company fails to satisfy these obligations, its directors may become personally liable for an equivalent penalty. Once a DPN is issued, the director generally has only 21 days before the Commissioner may commence recovery proceedings. Importantly, that period runs from the date the notice is issued, not from when the director receives or reads it.

Lockdown and non-lockdown penalties

The options available to directors depend largely on whether the penalty is a lockdown penalty or a non-lockdown penalty. The distinction between lockdown and non-lockdown penalties is critical because it determines what options remain available to a director after a DPN is issued.

Non-lockdown penalties

A penalty will generally be a non-lockdown penalty where the company has reported the underlying liability within the required timeframe but failed to pay it.

For PAYG withholding and GST liabilities, reporting generally must occur within three months of the relevant lodgement due date. For SGC liabilities, the required SGC statement must be lodged by the relevant due date.

If a DPN relates to a non-lockdown penalty, the penalty may be remitted if, within the 21-day DPN period, the company:

1. pays the liability;

2. appoints an administrator;

3. appoints a small business restructuring practitioner; or

4. begins to be wound up.

Lockdown penalties

A penalty will generally become a lockdown penalty where the company fails to report the liability within the required timeframe.

Once a penalty is locked down, appointing an administrator, engaging a restructuring practitioner, or placing the company into liquidation will generally not remove the director's personal liability.

However, lockdown does not remove the statutory defences. Whether a director can establish a defence remains a separate question from whether the penalty can be remitted by placing the company into external administration.

The key message is simple: payment and lodgement are separate obligations. Even where a company cannot immediately pay its liabilities, lodging returns and statements on time may preserve important options for its directors.

What defences may be available?

The director penalty regime provides limited statutory defences. Broadly, a director may avoid liability if:

• because of illness or another good reason, it would have been unreasonable to expect the director to participate in the management of the company, and the director did not participate in management during the relevant period;
  

• the director took all reasonable steps to ensure that the company complied with its obligation, appointed an administrator or small business restructuring practitioner, or began to be wound up; or
  

• there were no reasonable steps the director could have taken to bring about any of those outcomes.

For SGC and GST-related penalties, a further defence may be available to the extent that the liability resulted from the company taking reasonable care in applying the relevant legislation and adopting a reasonably arguable position.

When determining whether all reasonable steps were taken, regard is given to when and for how long the person was a director, the extent of their participation in the company’s management and all other relevant circumstances. The defence is therefore fact specific. It is not enough merely to demonstrate that the director acted honestly, relied on another director or adviser, or took general steps to improve the company’s financial position. The relevant steps must address the particular statutory obligations giving rise to the penalty.

Importantly, the test is whether all reasonable steps were taken, not simply whether those steps ultimately succeeded. An unsuccessful attempt to secure payment does not, by itself, establish that the defence is unavailable. However, what is reasonable may change as the liability remains outstanding and attempts to obtain payment fail.

The defences must also cover the entire period during which the director was subject to the obligation. Steps taken only after the liability has remained outstanding for a significant period may therefore be insufficient, particularly where unsuccessful attempts to secure payment are not followed promptly by steps towards administration, restructuring or liquidation. Directors seeking to rely on the defence should preserve contemporaneous evidence of the advice obtained, the decisions made and the action taken in response to each outstanding liability.

What happened in Ostwald?

The consequences of failing to satisfy superannuation obligations on time were recently illustrated in Ostwald v Commissioner of Taxation [2026] FCA 868. Ostwald Bros Pty Ltd paid employee superannuation contributions late for three quarters in 2016 and 2017. In one quarter alone, the company transferred more than $680,000 to a superannuation clearing house on the due date. However, the relevant superannuation funds did not receive the contributions until three days later. The company also failed to lodge the required SGC statements.

Although the superannuation contributions were ultimately paid, that did not resolve the issue. Once the payment deadline was missed, a separate SGC liability arose, together with a corresponding obligation to report that liability to the ATO.

The company entered external administration and liquidation in 2017. However, the Commissioner did not issue DPNs to the company's three directors until February and March 2024, approximately seven years after the underlying defaults.

The case serves as a reminder that director penalty exposure can remain long after a company has ceased trading.

The directors' defence

The directors sought to rely on the statutory "all reasonable steps" defence.

They pointed to a range of measures undertaken during the relevant period, including:

• engaging professional advisers;

• seeking financial and restructuring assistance;

• renegotiating banking arrangements; and

• selling company assets.

The Commissioner was not satisfied that the defence had been established. The directors sought judicial review of that decision in the Federal Court. Their applications were ultimately dismissed.

The central difficulty for the directors was that the steps relied upon were primarily directed towards improving the company's financial position, maintaining its operations and ensuring employee superannuation was paid. They were not sufficiently directed towards addressing the company's separate SGC liabilities and reporting obligations.

The Court accepted the Commissioner's position that the relevant enquiry was not whether the directors had acted responsibly in attempting to save the business. Rather, the question was whether they had taken all reasonable steps to ensure compliance with the company's SGC obligations.

The Court emphasised that efforts directed towards business survival, refinancing arrangements or payment of employee entitlements do not necessarily satisfy the statutory defence where the relevant tax liabilities remain unaddressed.

Statutory defences are demanding, but they remain meaningful protections. Directors should neither assume that general efforts to save the company will be enough nor dismiss the possibility of a defence without examining the particular obligations, circumstances, and evidence.

Liquidation may not end the risk

One of the most significant aspects of Ostwald is the timing of the DPNs.

The company entered liquidation in 2017, yet the DPNs were not issued until 2024. The case demonstrates that directors may face personal recovery action many years after a company has ceased trading, particularly where liabilities were not reported on time and became lockdown penalties.

Placing a company into liquidation does not, of itself, bring a director's exposure to an end.

While the statutory defences remain available, Ostwald confirms that they are likely to be construed narrowly. Directors cannot assume that substantial efforts to save a struggling business, refinance operations or meet employee obligations will be sufficient to avoid personal liability.

The steps taken must be directed to the specific taxation obligation giving rise to the penalty.

What does this mean for directors?

The decision provides several important practical reminders:

• ensure superannuation contributions are received by the relevant superannuation fund on time, particularly where payments are made through a clearing house;

• remember that payment and reporting are separate obligations;

• if superannuation is paid late, do not assume the issue has been resolved. A separate SGC liability may arise, together with additional reporting obligations.

• lodge required returns and statements on time, even where the company cannot immediately pay the underlying liability;

• do not assume that attempts to refinance, restructure or save the business will necessarily satisfy the statutory defences available under the director penalty regime; and

• seek advice early if the company experiences financial difficulty or falls behind on tax or superannuation obligations.

The decision demonstrates that courts will closely scrutinise whether directors' actions were directed towards the specific taxation liability in question, rather than broader efforts to manage financial distress.

Authors: Chris Kintis & Joseph Sobbi

 

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.