Running a company in Australia comes with a fundamental legal assumption baked in: the company is its own separate legal entity, distinct from you as a director or owner. That separation, often called the "corporate veil," has traditionally shielded directors from personal liability for company debts. But over the past five years, that protection has been significantly wound back, and many founders and directors still have no idea it happened.
Legislative changes that took effect in April 2020, right in the middle of Australia's first COVID-19 lockdowns, quietly but dramatically expanded the Australian Taxation Office's power to pursue directors personally for their company's unpaid tax obligations. If you are a director of an Australian company, this affects you directly. Here is what you need to know.
What Changed in 2020 and Why It Matters
Before 2020, directors could already be held personally liable for two types of unpaid company tax: Pay As You Go (PAYG) withholding and superannuation guarantee charges. The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019, which came into force in April 2020, extended that personal liability to cover:
- Goods and Services Tax (GST)
- Luxury Car Tax (LCT)
- Wine Equalisation Tax (WET)
This was a substantial shift. The new rules impose strict liability on directors, meaning it does not matter whether you acted in good faith or were unaware of the unpaid amounts. If the company owes the debt and you were a director at the relevant time, you can be personally on the hook.
Because these reforms coincided with the chaos of early pandemic lockdowns, JobKeeper announcements, and border closures, they received very little attention in the business press. The result is a genuine knowledge gap that is still catching directors out in 2025.
How the ATO Pursues Directors: The Director Penalty Notice Regime
The ATO's primary tool for enforcing director liability is the Director Penalty Notice (DPN). There are two types, and the difference between them is critical.
Non-Lockdown DPNs
If the company's tax obligations have been reported on time but remain unpaid, the ATO will typically issue a non-lockdown DPN. Once you receive one, you have 21 days to take action. Your options during that window are:
- Pay the debt in full
- Place the company into voluntary administration
- Begin liquidation proceedings
Acting quickly here can stop personal liability from crystallising. The 21-day window is tight, but it exists.
Lockdown DPNs
These are far more serious. A lockdown DPN is issued when tax obligations have gone unreported for more than three months past their due date. Once a lockdown DPN lands, your only option to avoid personal liability is to pay the debt in full. Placing the company into administration or liquidation will not help. Personal liability is effectively automatic.
The ATO has been issuing significantly more DPNs in recent years, and a large proportion of them are the lockdown variety. That means directors who fall behind on lodgements, not just payments, are at the greatest risk.
What Is Actually at Stake: Your Personal Assets
For many directors, the real-world consequences of a DPN are confronting. The ATO is not just a creditor seeking repayment from the company. When personal liability is triggered, it is coming after you.
The risks include:
- Your family home. Under the Bankruptcy Act 1966, bankruptcy trustees can force the sale of a family home if there is sufficient equity. Courts have upheld this even where directors acted in good faith.
- Your credit rating. The ATO has the power to disclose significant tax debts to credit bureaus, which can affect your ability to refinance a mortgage or secure new lending. If your business relies on a loan agreement or personal guarantee structure, this can flow through to your financing arrangements as well.
- Bankruptcy proceedings. The ATO has become increasingly willing to initiate personal bankruptcy proceedings against directors who do not address company tax liabilities. Personal insolvencies linked to DPNs have risen materially since 2020.
Data from the Australian Institute of Company Directors' 2024 Director Sentiment Index confirms that legal and regulatory compliance now ranks as the second most concerning issue for directors, with personal liability specifically cited as a key driver. Meanwhile, a January 2025 MYOB Business Monitor found that more than one in five SMEs are experiencing significant stress around tax compliance, up from 16% in late 2023.
Practical Steps to Protect Yourself as a Director
The good news is that the risks are largely manageable if you stay on top of compliance and take early action when things get tight. Here is where to focus.
Keep your lodgements current
The single most effective way to avoid a lockdown DPN is to ensure all tax lodgements are submitted on time, even if you cannot pay the full amount. Late lodgement is what triggers the lockdown mechanism. Reporting on time, even with a debt outstanding, preserves your negotiating options.
Engage the ATO early
If the company is struggling to meet its tax obligations, do not ignore the problem. The ATO does offer payment plans and structured arrangements, including automated plans for smaller debts and negotiated arrangements for larger ones. Registered tax agents and legal advisors can often access priority resolution channels and negotiate more favourable terms than directors acting alone.
Set up proper governance structures
For boards with more than one director, it is worth establishing clear oversight of tax compliance. This means:
- Regular reporting to the board on the status of BAS lodgements, PAYG and superannuation obligations
- Early warning triggers for any tax obligations that are approaching overdue status
- A documented crisis response process for ATO enforcement actions
Separate personal and business finances clearly
Maintaining a clear separation between personal and business assets is basic hygiene, but it becomes even more important given the personal liability exposure that now exists. Consider director and officer (D&O) liability insurance as part of your risk management framework.
The Bigger Picture for Australian Founders
The expanded director liability regime was designed to crack down on illegal phoenix activity, where directors strip a company of assets and then let it collapse to avoid paying creditors and the ATO. That is a legitimate policy goal. But the strict liability approach means that legitimate founders and small business owners who simply fall behind during a difficult period face the same consequences as bad actors.
Business closure data from the Australian Bureau of Statistics shows that 2024 saw record numbers of business closures, with small businesses the most affected. The compliance burden on SMEs is disproportionately high compared to larger companies, and the personal stakes for directors of those businesses have never been greater.
Understanding your exposure is the first step. Acting on that understanding, through good governance, timely lodgement, and early professional advice, is how you protect yourself and your business.
Mode.law helps Australian founders and business owners stay on top of their legal foundations. Browse our document library to access founder-ready legal templates, including agreements that can help you structure your business relationships and obligations clearly from the start.
This article contains general information only and is not intended to constitute legal, financial, or tax advice. Please seek professional advice specific to your circumstances before acting on any of the information contained here.