Evidentiary DPN defence concerns: ATO needs to make leeway for individual circumstances

Following consultation with its members, The Tax Institute received feedback suggesting that the current Director Penalty Notice (DPN) regime is seen as “unfair”, particularly when taxpayers face genuine compliance barriers, or have a limited understanding of their rights or obligations when issued with a DPN.

In its submission to the Tax Ombudsman’s Review: ATO’s administration of Director Penalty Notices, The Tax Institute has noted that members are broadly concerned about the ATO’s treatment of individual circumstances, and the effectiveness of its communication with directors.

Written by the institute’s president, Tim Sandow, the submission argued that minority directors who have exhausted all steps reasonably available to them will still be liable for the penalty notice.

“We are concerned that minority directors can face significant practical difficulties where, despite making genuine and substantial efforts to address the company's tax debts, or to place the company into voluntary administration or liquidation, they are unable to do so because those actions require the support of a majority of directors,” it said.

It recommended that the ATO’s assessment take into account practical limits faced by minority directors in their ability to compel lodgement, payment of liabilities, or the adoption of other debt management options.

Better communication, greater vulnerability cognisance

While a director who is facing illness may be able to undergo day-to-day tasks that follow established routine, or habitual execution, they may lack the capacity to fulfil governance, oversight, and decision-making responsibilities associated with managing a company, The Tax Institute said.

Bringing the conversation back to the ATO’s vulnerability framework, the institute said that a director continuing to work out of necessity should not be taken as evidence of their ability to effectively manage the company's affairs.

Barriers such as mental illness, medical conditions, or domestic violence stand in the way for some directors, it said, stressing that the ATO must also take into consideration that some directors merely continue work as a coping strategy or to provide a sense of routine and stability.

“The ability to perform limited work-related functions in these circumstances does not necessarily indicate an ability to manage the broader affairs of a company or to discharge all of the responsibilities expected of a director during the relevant period,” the submission said.

Evidentiary roadblocks

For vulnerable directors, the evidence that may be crucial to lodge a defence against a DPN may not always be available, the institute said.

“Evidence of direction or control by a de facto director will not always be available, as such conduct often occurs in private and the individual exercising control may be unwilling to provide evidence that could implicate them.”

“We also note difficulties that can arise where a taxpayer's involvement in company affairs has been influenced by a de facto director through coercion, intimidation or threats of violence. In these circumstances, reliance on the principle that a taxpayer cannot rely on a lack of knowledge may not fully account for the realities of domestic and family violence.”

“A more responsive and flexible approach be adopted when dealing with taxpayers who may have been appointed as directors through coercion, financial abuse, undue influence or without a genuine understanding of the role and its responsibilities,” it recommended.

Not all directors enter the role willingly, with some being coerced or appointed prior to them understanding the implications and responsibilities of directorship, it added.

Some of these knowledge gaps involve the directors having limited involvement in or knowledge of the management of the company, and a lack of access to company records, financial information and decision-making processes.

Directors entering the role as a “placeholder“ have also been seen in various communities.

“We are aware of cases involving Indigenous community members who have been appointed as directors to assist a company in obtaining Indigenous business certification, despite having little involvement in the operation of the business.“

Clearer communications

It is not uncommon for directors to receive a DPN as their first warning, with member feedback calling for communications that help distinguish routine debt collection activities from situations that may give rise to personal liability under the DPN regime.

“The ATO frequently attempts to contact directors from unknown or blocked telephone numbers without first notifying them through other channels, such as email or text message. Given the prevalence of spam and scam activity, many individuals are understandably reluctant to answer calls from unknown numbers,” the institute said.

“As a result, the first substantive communication some directors receive regarding the issue may be the DPN itself. By that stage, the matter may already have escalated significantly, reducing the opportunity for early engagement and resolution while increasing stress and uncertainty for affected directors,” it said.

The Tax Institute called for a more contemporary, multi-channel communication approach to be taken for notices preceding a DPN, through email, SMS or secure online messaging advising.

This submission follows the institute’s collaboration with its national technical committees.

“While members generally recognise the important role played by the DPN regime in encouraging compliance with tax obligations, feedback indicates that aspects of the ATO's administration of the regime can produce outcomes that are perceived as unfair, particularly where taxpayers face genuine barriers to compliance or have limited understanding of their rights and obligations,” it concluded.

The report for the Ombudsman’s review is expected in April 2027.