Director penalty notices: what they mean for borrowing

Why this matters more than an ordinary tax debt

Trading through a company normally keeps the business’s debts away from your own bank account — it’s a big part of why people incorporate. The DPN regime cuts through that wall, letting the ATO reach past the company and pursue directors personally for particular tax amounts.

For a lender, that changes everything. If you’re guaranteeing a business loan and you also face personal liability for company tax, your personal position as a guarantor is much weaker. So lenders treat DPNs seriously and will ask about them directly.

This guide gives a general overview. Your situation should be assessed by your accountant or a lawyer, ideally as soon as a DPN arrives.

What debts a DPN covers

Only three company obligations fall within the regime:

Liability	In plain terms
PAYG withholding	Amounts taken out of staff pay that were meant to reach the ATO
GST	The company’s net GST bill
Super guarantee charge	What the ATO levies when staff super was missed or paid late

A company’s own income tax sits outside this particular regime. Other personal liability regimes may exist for directors in some circumstances, so check with your adviser.

Why timing is critical

Paying late and lodging late are treated very differently. What shapes a director’s choices is whether the BAS and super guarantee statements went in on time — even where the money itself never followed.

In outline:

• Lodged on time: the notice usually gives a brief period in which the director can get the company to clear the amount, bring in an administrator or a small business restructuring practitioner, or start a wind-up. Any of these may cancel the penalty.
• Lodged late: where PAYG withholding and GST went unreported for roughly three months past their due dates, or the super statement missed its lodgement date, people call it a “lockdown” notice. Insolvency appointments then typically won’t cancel anything, and paying is usually what’s left.

The exact rules and timeframes are set out by the ATO and in the law, and can change. Don’t rely on general information when a DPN arrives; get professional advice immediately and diarise the dates on the notice.

How lenders see a DPN

Situation	Typical lender view
No DPN, all liabilities reported on time	Normal tax-debt assessment
DPN issued, within response window	Urgent, but options may still exist
Lockdown DPN	Personal liability likely; needs a payment solution
DPN with a payment plan in place	Assessed case by case
Directors also guaranteeing the loan	Lender considers combined personal exposure

Many banks will stop at any DPN. Alternative and property-secured lenders may consider it, particularly where the loan is being used to pay the underlying debt.

Using finance to resolve a DPN

Where a DPN relates to a debt the company can’t pay from cash flow, some directors use property-secured finance to pay the company’s tax debt directly. Once the underlying debt is paid, the penalty is resolved. A loan that pays the ATO directly is a common structure.

This is a significant decision. It converts a potential personal liability into a secured debt, and the security, often the director’s home, is at risk if the loan isn’t repaid. Before proceeding, a director should:

1. get advice from an accountant and lawyer on the DPN, the deadlines and the alternatives,
2. understand whether the company is solvent, and whether trading on is appropriate,
3. understand the full cost of the loan in dollars,
4. have a realistic plan for repaying the loan.

If, after advice, you’re considering finance to deal with a DPN, send us a short enquiry.

Preventing a DPN in the first place

The most effective protection is simple: lodge on time, even if you can’t pay on time. Reporting liabilities on time keeps more options available if things go wrong later. In practice:

• Lodge every BAS by its due date.
• Report super guarantee shortfalls promptly if super can’t be paid on time.
• Talk to the ATO about a payment plan early; our guide to ATO payment plans before borrowing explains how.
• Keep a separate account for PAYG withholding, GST and super.
• Check that your ATO and ASIC addresses are current, so notices reach you.

New directors, take care

Stepping onto a board where withheld PAYG, GST or super charge is already outstanding can leave you exposed to those amounts too, unless they’re sorted within a fixed time of your start date. Ask for the company’s ATO position before you accept the role.

What to tell a lender

If a DPN has been issued, a lender will want:

• a copy of the notice and its date,
• the company’s current ATO statement,
• what’s been reported and when,
• any steps taken since the notice, and the advice received,
• your proposed solution, and how the loan fits into it.

A clear, honest summary helps. See our guide to writing a letter of explanation.

Illustrative example: The director of a small labour-hire company received a DPN for unpaid PAYG withholding after a large client went into administration. The liabilities had been reported on time. After urgent advice, the director used a private second mortgage over her home to pay the company’s debt within the notice period, and the company continued trading under a revised client mix.

A director’s first-week checklist after receiving a DPN

Every situation needs tailored advice, but these steps are almost always sensible:

1. Note the date of the notice and calculate the response period it mentions.
2. Contact your accountant or lawyer immediately, and send them a copy.
3. Get the company’s ATO statement of account, showing which liabilities are unpaid.
4. Confirm which amounts were reported on time and which weren’t.
5. Assess the company’s overall financial position with your adviser, including whether it’s solvent.
6. Don’t ignore the notice. Silence narrows options quickly.
7. If finance might be part of the solution, start that conversation early, because the timeframe is short.

Other directors and the notice

If there are several directors, each may receive their own notice and each may be personally liable. That can create tension, especially if one director has more personal assets than the others. It’s important that all directors get advice and, where possible, agree on a coordinated response. A lender considering finance to resolve the debt will want to know who’s involved and who’s providing security.

Keeping super and PAYG separate

Many DPN situations start with good intentions: using money set aside for PAYG withholding or super to cover wages or suppliers during a tight month. It’s understandable, and it’s risky. Keeping a separate account for these obligations, and transferring into it each pay run, is one of the most effective protections a director can put in place.

Don’t wait on a DPN

A director penalty notice is time-sensitive. Get advice first, then, if finance is part of the answer, we can help. Our enquiry takes about a minute, there’s no credit check at that initial stage, and your details aren’t sent to a queue of lenders. A real person reads your situation and calls you. Please include the date on the notice and whether the amounts were reported on time; those two facts shape every option. Talk to us.