In recent years, certain legislative changes have fundamentally altered the relationship between company directors and the tax obligations of their businesses. The traditional protection offered by the corporate veil -a bedrock principle of Australian business law -has been progressively eroded through amendments designed to combat illegal phoenixing activity.
For directors and executives, understanding these changes is crucial to protecting personal assets and making informed risk management decisions. To help you unpack these changes and better navigate them, here is our latest blog from Attune Legal. Read on.
First thing’s first: What is the ‘Corporate Veil’?
This term refers to the legal principle that a company is a separate entity from its owners. If the company is a separate entity, this shields the owner from personal liability for the company’s debts or actions.
Limited Liability Protection and how it has become eroded
To encourage entrepreneurial risk-taking and innovation, the concept of limited liability companies was established. For over a century following the landmark Salomon v Salomon (1897) case, directors could generally rely on corporate separateness to shield personal assets from business debts – except in cases of fraud.
However, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019, which took effect from April 2020, significantly expanded the Australian Taxation Office’s powers to hold directors personally liable for company tax debts. These changes extended director liability beyond the previously established PAYG withholding and superannuation guarantee charges to include:
- Goods and Services Tax (GST)
- Luxury Car Tax (LCT)
- Wine Equalisation Tax (WET)
This expansion represents a fundamental shift in how the corporate veil functions in Australia, creating strict liability for directors, regardless of intent or circumstances surrounding the tax debt.
How the pandemic influenced awareness around these changes
What makes the changes particularly noteworthy is not just their scope, but the timing of their implementation. The amendments took effect in April 2020 -precisely when Australia was implementing its first COVID-19 lockdowns. This timing resulted in what can only be described as a tectonic shift in corporate law going largely unnoticed by the business community.
As the nation grappled with unprecedented health measures, border closures, and economic uncertainty, these fundamental changes to director liability received minimal media coverage and public discussion. The government was simultaneously introducing JobKeeper payments and other business support measures while implementing reforms that substantially increased director personal liability.
Many directors remained unaware of these changes until enforcement actions began to accelerate when pandemic support wound down. This in turn has created a dangerous knowledge gap in the business community even in 2025.
The Director Penalty Notice Regime
The primary mechanism through which the ATO pursues directors is the Director Penalty Notice (DPN) regime. Under this system, directors can receive two types of notices:
- Non-lockdown DPNs
These provide directors with a 21-day window to take specific actions:
- Pay the debt in full
- Place the company into voluntary administration
- Begin liquidation proceedings
- Lockdown DPNs
These are more severe and apply when tax obligations remain unreported for over three months from their due date. With lockdown DPNs:
- Directors have no remission options except full payment
- Personal liability is automatically triggered
- The 21-day response period becomes effectively moot
The ATO has dramatically increased its issuance of DPNs in recent years, with a significant percentage classified as “lockdown” notices that provide limited options for directors.
Personal Asset Risks for Directors
When directors face personal liability for company tax debts, several serious consequences may follow, such as:
Family Home Vulnerability
Under the Bankruptcy Act 1966, trustees can force the sale of family homes if equity exceeds protected thresholds. Recent court decisions have upheld trustees’ rights to sell homes even when directors acted in good faith, provided equity exists.
Credit Reporting and Financial Impact
The ATO’s disclosure of significant tax debts to credit bureaus can damage directors’ personal credit ratings and reduce their ability to refinance properties or secure new loans.
Bankruptcy Proceedings
Personal insolvencies linked to DPNs have reached concerning levels, with a significant percentage involving family home liquidations. The ATO has become increasingly aggressive in pursuing bankruptcy proceedings against directors who fail to address company tax liabilities.
Implications for the Economy and Entrepreneurs
The current director liability framework has significant implications for Australia’s business environment and that of the economy:
Recent industry research highlights concerning trends since the 2020 implementation of expanded director liability:
- Legal and regulatory compliance ranks as the second most concerning issue for directors, (30% in 1H 2024 Director Sentiment Index Survey, Australian Institute of Company Directors). In response to the question “Why legal and regulatory compliance?” a respondent was quoted as saying “Complex, onerous and costly at a business level and risk to directors at a personal level*”.*
- The January 2025 MYOB Business Monitor confirms that the pressure from tax compliance obligations on SMEs has increased, with more than one in five businesses now reporting significant stress in this area, and a strong desire for government action to reduce this burden. 22% of SMEs reported experiencing “extreme” or “quite a lot” of pressure from the time spent meeting tax compliance obligations. This figure is up from 20% in June 2024 and 16% in December 2023.
- According to this article, recent data from the Australian Bureau of Statistics indicates that business closures reached unprecedented levels in 2024, increasing by 15,238 compared to the previous year, with small businesses being the most affected. Meanwhile, statistics from money.com.au show that Australia experienced its highest business turnover in 2024, with 88 businesses shutting down for every 100 new businesses that commenced operations.
These post-2020 statistics reveal that the expanded liability regime is not just affecting individual directors but likely playing a role in reshaping Australia’s business landscape, and appetite for entrepreneurial risk. Strict liability disproportionately impacts startups and smaller businesses, potentially leading to increased market concentration as only established firms with robust compliance infrastructure can navigate the complex tax landscape.
Small and micro businesses also spend significantly higher percentages of revenue on tax compliance compared to larger firms, creating structural disadvantages in an already challenging economic environment.
Negotiating with the ATO: Options and strategic considerations for directors
For directors facing potential personal liability, proactive engagement with the ATO is essential. Here are some key options and strategic considerations for directors:
Maintaining Lodgement Compliance
Before any negotiation can begin, directors must ensure all tax lodgements are up-to-date. The ATO generally will not consider payment arrangements without current lodgement compliance.
Payment Plan Options
The ATO offers various repayment options based on debt size and business circumstances. These may include:
- Automated payment plans via online services
- Negotiated arrangements with ATO debt officers
- Structured plans with potential interest remissions
Professional Representation
Registered tax agents and legal representatives can often secure more favourable outcomes through:
- Access to priority resolution channels
- Strategic use of viability assessments
- Consolidated approaches to multiple tax debts
Risk Management Approaches
- Implement robust tax reporting systems to avoid lockdown DPNs
- Consider director and officer liability insurance coverage
- Establish clear segregation between personal and business assets
Governance Frameworks
- Create board-level oversight of tax compliance obligations
- Implement early warning systems for potential tax issues
- Develop crisis response protocols for ATO enforcement actions
In Conclusion
Australia’s current approach to director liability for company tax debts represents a significant departure from traditional limited liability principles. While designed to combat illegal phoenixing, these measures have created substantial risks for legitimate business operators, particularly in the SME sector.
Directors must remain vigilant about tax compliance and understand the potential personal implications of company tax debts. By implementing appropriate governance structures, maintaining open communication with the ATO, and seeking professional advice at the first sign of financial distress, directors can better navigate this challenging landscape.
Disclaimer
This article contains general information only and is not intended to be legal, financial, or tax advice. The information may not reflect current legal developments and may change without notice. No reader should act or refrain from acting based on this information without seeking professional advice specific to their situation. Attune Legal expressly disclaims all liability for any actions taken or not taken based on this article.
For specific advice regarding your situation and how these issues may affect you, please contact Attune Legal to arrange a consultation with one of our experienced advisors.
