24 Sep 2026Importance of acting early on a DPN debt
If the ATO has commenced court proceedings to recover a director penalty notice (DPN) debt against you, the most important thing to do is to take action now. Your situation can only get worse if you ignore it.
You need to understand the claim against you and take one of three options:
- Get the company to pay its ATO debt; or
- File a defence if you have one; or
- If you have no defence, engage with the ATO to negotiate a settlement proposal.
Active engagement with tax office better than passivity
Most importantly, do not panic if you do not have a defence to the claim. Defending claims of this type can be difficult and therefore expensive. A significant percentage of directors facing DPN claims do not have an arguable defence.
That doesn’t mean nothing can be done. The best way to deal with the claim is to take early action to engage actively with the ATO. This will give you time to consider your options and decide the best one for you.
If you do not take control, the decision will be made for you by others.
“Parallel debt” owed to tax office by you and your company
The tax office can issue you with a Director Penalty Notice if you are, or you have been, a company director and your company has an unpaid ATO debt for GST, PAYG withholding tax or unpaid compulsory employee superannuation contributions.
The Director Penalty Notice makes you personally liable for your company’s debt. (Please see I’ve received a Director Penalty Notice. What is it? And what do I do now?)
The debt is owed to the ATO by both you and your company at the same time. It is a called a “parallel debt”. The ATO can take legal action against you, or your company, or both, to recover the parallel debt.
Can your company pay its ATO debt?
If your company can pay its ATO debt, then when it does, it will also be repaying your debt.
If your debt is repaid, the tax office has no reason, or entitlement, to continue the court proceeding against you.
If the company has enough money to pay its ATO debt, this is the quickest and simplest way to deal with the ATO’s court case against you.
It is not common for a company to have enough money to pay its ATO debt when a Director Penalty Notice has been issued. Often, the company will have ceased trading or be in liquidation.
Defences to a claim for a DPN debt
There are three defences provided by the Tax Administration Act (Cth) 1953 (section 269-35 of schedule 1) to a claim for a DPN debt:
- You did not take part in the management of the company because you were ill (or for some other good reason); or
- You took all reasonable steps to ensure the directors of the company ensured that the company paid its relevant tax debt; or that an administrator, small business restructuring practitioner or liquidator was appointed to the company; or
- For superannuation and GST debts, the debt arose because the company interpreted the relevant tax legislation in a way that was different to the ATO’s interpretation, provided the way the company interpreted the legislation was reasonably arguable and the company took reasonable care when doing so.
Meeting thresholds to establish defences to DPN debt
The threshold for establishing the illness test is quite high. The illness must have continued for the entire period that a person was a director.
The illness does not need to be incapacitating, but it must have seriously adversely affected a person’s ability to participate in the management of the company (see Brereton AJ at [71], Snell v Deputy Commissioner of Taxation [2020] NSWCA 29).
The “reasonable steps” test is very difficult to establish for a sole director of a company, particularly if they were a director for a long period of time. A director who was one of several, or who was only appointed for a limited period, will have better prospects of raising this defence.
The third defence, of differing interpretations of tax legislation, will rarely apply for smaller and medium-sized companies.
It may apply where a company obtained and followed expert tax or superannuation advice, only for the ATO to disagree with the advice, and therefore, reject the calculated amount of the GST debt or employee superannuation obligation.
Filing a defence to a tax office claim
If you do have a potential defence to the claim, it is important you file your defence by the date specified in the court rules. These time periods vary from state to state and depend on the relevant court where the ATO has commenced proceedings.
If you do have a defence, we still recommend engaging with the tax office at an early stage to attempt to resolve the claim against you.
Litigation is stressful, expensive and time consuming. The outcome is also uncertain, making litigation risky. In our experience, there is almost always a better result for our client if they can settle a proceeding before a final hearing.
Negotiating a settlement proposal if you have no defence
If you do not have a defence to the claim, then it is best to take action early by contacting the ATO to negotiate a settlement proposal.
This does not mean “negotiation” the way most people understand. The ATO has significant limitations on its ability to compromise tax debts owed to the Commonwealth. It is generally not possible to make an offer to pay only part of your tax debt the ATO.
The ATO is able to accept a settlement proposal from a director that gives the director time to pay their DPN debt. The earlier these negotiations commence, the better.
Avoiding bankruptcy proceedings through active engagement with ATO
Most importantly, the ATO will ordinarily agree not to take further steps in the proceedings while negotiations are continuing. This means no default judgment against you, no bankruptcy notice being served on you; and no bankruptcy proceedings against you.
By negotiating early, you will buy the time needed to understand how long the ATO may agree to give you, investigate your options and come up with a plan to pay the debt.
Such a plan could involve applying for a loan to pay out some or all of the debt, without a judgment ruining your credit rating.
A reprieve from the ATO also gives you time to talk to friends or family, to see if they are prepared to help you pay the debt, and to document any loan agreement between you.
You will also have the opportunity to assess your options if you cannot pay out the debt in full. This may mean bankruptcy, but it may also mean other arrangements that could enable you to avoid it.
