Can You Dispute the Underlying Tax Debt and the DPN at the Same Time?

You’ve just opened a Director Penalty Notice. The company’s tax debt sits behind it, a debt you believe is wrong, inflated, or based on an assessment you’re already disputing.

Now you’re facing two separate battles: one against personal liability under the DPN, another against the tax debt itself.

Can you fight both at once?

The short answer: yes, but not automatically, and not without risk. Disputing the company’s tax assessment does not shield you from a DPN. The two operate on different tracks, with different timelines and different consequences. But with careful sequencing and sharp execution, you can challenge both concurrently without one derailing the other.

This article walks you through how the regime actually works, where the two disputes intersect, and what you need to do to protect yourself on both fronts.

What a DPN Does and Why the Underlying Tax Debt Matters

A Director Penalty Notice makes you personally liable for unpaid company tax debts. The regime is blunt: if the company owes Pay As You Go withholding, Superannuation Guarantee Charge, or certain GST amounts, the ATO can pursue you directly.

The twist: your liability is not contingent on whether the underlying debt is correct.

Think about that for a moment. You might be objecting to a GST assessment. You might have lodged a review with the Administrative Appeals Tribunal. You might have strong grounds to argue the debt should never have been raised.

None of that automatically stops the DPN.

The ATO’s position is this: the DPN creates a separate liability. Whether the company’s debt is right or wrong is a company matter. Whether you’re liable as a director is a personal matter. The two can overlap, but they don’t collapse into one.

This is why many directors get caught. They assume that if they’re disputing the tax debt, the DPN will pause or fall away. It won’t. Not unless you take specific action within the DPN’s strict timeframes.

The 21-Day DPN Window Versus Tax Objection Timelines

When a DPN arrives, you have 21 days to act. This is not negotiable. It’s not a reminder. It’s a hard deadline.

Within those 21 days, you must do one of three things to avoid personal liability:

If you do nothing, the liability locks in. After that point, you’re personally on the hook even if the company later disputes and wins the underlying tax case.

Now compare that to tax objections. If the company wants to dispute the assessment, it typically has 60 days (sometimes longer, depending on the type of tax) to lodge a formal objection with the ATO. If the objection is rejected, the company can escalate to the Administrative Appeals Tribunal or Federal Court.

See the problem? The DPN’s 21-day clock is ticking while the tax objection process is just getting started. These timelines don’t align. They run in parallel, and you need to manage both.

Can you lodge a tax objection while responding to a DPN? Yes. Should you? Often, yes. But lodging the objection alone will not satisfy the DPN requirements. You need a strategy that addresses both tracks.

Can You Object to the Tax Debt While Responding to the DPN?

Yes. You can, and often should, pursue both.

Here’s how it works in practice. The company lodges a formal objection to the underlying assessment, setting out why the debt is wrong. At the same time, you respond to the DPN by taking one of the actions required to avoid personal liability.

The objection challenges the company’s debt. The DPN response protects you personally.

These are not mutually exclusive. But they are not automatically connected either. Just because the company objects doesn’t mean the ATO will remit your director penalty. You need to be explicit about the link.

If you believe the tax debt is genuinely wrong and you want to dispute it, consider this approach:

This dual-track approach keeps both disputes alive. You’re not abandoning the tax objection, and you’re not ignoring the DPN.

But understand this: the ATO is not obliged to pause your personal liability just because the company is disputing the debt. If you want certainty, you’ll need to take one of the three statutory steps within 21 days.

Lockdown Versus Non-Lockdown DPNs and Their Impact on Dual Disputes

Not all DPNs are created equal. The type of DPN you receive determines how much room you have to dispute both the notice and the underlying debt.

A non-lockdown DPN gives you three options within 21 days: pay the debt, appoint an administrator, or wind up the company. If you take one of those steps, your personal liability is discharged.

A lockdown DPN is harsher. It’s issued when the company has failed to report the liability within three months of the due date. Once you receive a lockdown DPN, the only options are to appoint a voluntary administrator or put the company into liquidation. Paying the debt no longer protects you. Your personal liability is already locked in unless you trigger an insolvency process.

This has a direct impact on your ability to dispute the underlying tax debt.

If the DPN is non-lockdown and you believe the tax debt is wrong, you might argue that paying under protest preserves your rights. You pay to avoid personal liability, then pursue the objection to recover the funds. It’s not ideal, but it’s an option.

If the DPN is lockdown, payment doesn’t help. Your only way to avoid liability is to wind up or appoint an administrator. But winding up or administration can kill your ability to dispute the tax debt effectively. An administrator’s first priority is usually settling with creditors, not fighting the ATO over an assessment. A liquidator might pursue the dispute if there’s value, but you’ve lost control.

So what do you do if you’re facing a lockdown DPN and you believe the tax debt is fundamentally wrong?

You act fast. You lodge the objection immediately. You get advice on whether there’s a viable defence to the DPN itself, such as arguing the notice was invalid, not properly served, or based on incorrect information. If those defences exist, you fight the DPN directly. If they don’t, you may need to appoint an administrator and hope the objection process can be continued by the external administrator or, in rare cases, argue for remission after the fact.

It’s a tough position. But ignoring the lockdown DPN to focus on the tax objection is not a strategy. It’s a gamble you’ll almost always lose.

Statutory Defences and How They Intersect With Tax Reviews

Even if you don’t take action within 21 days, there are statutory defences to a DPN. These defences can sometimes intersect with disputes over the underlying tax debt.

The main defences include:

• You weren’t a director when the debt arose or when the obligation to pay or report it fell due.
• The company had a reasonable excuse for not meeting the obligation.
• You took all reasonable steps to ensure the company complied, or there were no reasonable steps you could have taken.
• The debt has been paid, or the company has gone into liquidation or administration.

The “reasonable steps” defence is where tax disputes start to matter. If the company was genuinely disputing the underlying liability and taking active steps to challenge it, you might argue you took reasonable steps to ensure compliance, because compliance wasn’t required while the debt was under genuine dispute.

But this defence is narrow. Courts have held that merely disputing a debt is not enough. You need to show you took tangible action: appointing advisors, lodging objections, seeking reviews, keeping the company informed, ensuring records were maintained. And critically, you need to show that your dispute was genuinely arguable, not a delaying tactic.

If the tax objection is solid, supported by a reasonably arguable position, backed by expert advice, you might be able to weave it into a reasonable steps defence. But it’s not automatic, and the burden is on you to prove it.

If the DPN has already been issued and you’re defending it in court, the fact that an objection is underway can support your case. It shows the debt was contentious, not clear-cut. It shows you were acting reasonably, not recklessly.

But here’s the reality: statutory defences are fought after the fact, often in Federal Court proceedings where the ATO is pursuing the penalty. At that point, you’re playing defence. It’s far better to manage both disputes proactively, within the initial timelines, than to rely on defences later.

ATO Enforcement During Disputes: Offsets, Garnishees, and Recovery

Here’s something most directors don’t realise until it’s too late: lodging an objection to the tax debt, or disputing the DPN, does not stop the ATO from taking enforcement action.

The ATO can issue garnishee notices to your bank. They can offset any tax refunds the company is owed. They can contact debtors who owe money to the company and redirect payments to the ATO. And if the DPN liability has locked in, they can pursue you personally for the full amount while the underlying tax dispute is still being heard.

This creates real pressure. You might have a strong objection pending at the AAT. You might be confident the tax debt will be reduced or wiped out. But in the meantime, the ATO is taking your money.

The law allows this because disputes don’t create a stay. An objection or review does not pause the debt. There are mechanisms to apply for a stay, asking the AAT or Federal Court to freeze collection while the dispute is resolved, but stays are not automatic, and they’re not granted lightly. You need to show serious prejudice if enforcement continues, and you need to provide security for the disputed amount in many cases.

What does this mean for you as a director facing both a DPN and a tax dispute?

It means you can’t afford to assume the dispute will pause everything. If you’re going to challenge both, you need to understand that enforcement can continue in parallel. You need to factor that into your decision-making. And you need to act quickly to either ring-fence assets, negotiate payment arrangements, or take steps to limit the ATO’s reach while the disputes run their course.

If you’ve received a DPN and the underlying tax debt is under objection, ask your lawyer about applying for a remission of the penalty on the grounds that the debt is not properly payable. This won’t always work, but it creates a record and sometimes buys time. At minimum, it signals to the ATO that you’re not ignoring the issue, you’re disputing it in good faith.

Practical Sequencing: Steps to Challenge Both Effectively

If you want to dispute both the DPN and the underlying tax debt, timing and sequencing are everything. Here’s a framework for managing both disputes without one derailing the other.

Day One to Day Three (DPN received):

• Confirm the date you received the DPN. Your 21-day clock starts from the date of service, not the date it was issued.
• Engage a lawyer who specialises in both tax disputes and DPN defence. This is not a matter for a generalist.
• Obtain all relevant company records: the original tax assessment, any prior correspondence with the ATO, evidence of payment history, BAS statements, and advice the company received about the liability.
• If the company hasn’t lodged an objection yet, draft it immediately. Don’t wait for the DPN deadline to pass.

Day Four to Day Seven:

• Lodge the company’s objection to the underlying tax assessment if it’s not already in process.
• Send a separate letter to the ATO addressing the DPN. Notify them that the underlying debt is under genuine dispute, set out the grounds briefly, and request remission of the director penalty.
• If you’re a current director, assess whether you took reasonable steps to ensure compliance. Document what you did: appointed accountants, sought advice, queried the ATO’s figures, maintained records.
• Identify whether the DPN is lockdown or non-lockdown. This determines your options.

Day Eight to Day Fourteen:

• If the DPN is non-lockdown and you can afford it, consider paying the debt under protest to discharge personal liability. You can then pursue the tax objection to recover the funds if successful.
• If payment is not viable or the DPN is lockdown, assess whether appointing a voluntary administrator or liquidator is the right move. This is a significant decision and requires advice on the company’s financial position and prospects.
• If winding up isn’t appropriate and you have a strong defence to the DPN itself, prepare to challenge the notice directly, arguing invalidity, incorrect service, or factual errors.

Day Fifteen to Day Twenty-One:

• Take the statutory action required to avoid liability: pay, appoint an administrator, or wind up.
• If you’re challenging the DPN on technical grounds, ensure your defence is lodged before the 21-day deadline expires. After that, personal liability locks in and you’re fighting uphill.
• Continue pursuing the tax objection in parallel. The objection process can take months, but it’s separate from the DPN response.

After Day Twenty-One:

• If you’ve satisfied the DPN requirements (paid, wound up, or appointed an administrator), your personal liability is discharged. The company can continue the tax dispute.
• If you didn’t act within 21 days, the ATO can now pursue you personally. At this stage, you’re looking at statutory defences and arguing that liability shouldn’t attach, but you’ve lost the easy exit.
• Monitor the tax objection closely. If it’s successful and the debt is reduced or cancelled, you may have grounds to seek remission of any penalties or interest the ATO imposed. But this won’t automatically reverse a locked-in DPN liability.

This sequencing is not optional. It’s the only way to protect yourself while keeping the tax dispute alive.

When Separate Proceedings Make Sense and When They Don’t

Sometimes, it makes sense to run separate proceedings, one challenging the company’s tax liability, another defending against the DPN. Other times, you need to consolidate or sequence them strategically.

Separate proceedings work when:

• The company has a strong, reasonably arguable objection to the tax debt (e.g., the ATO applied the wrong law, miscalculated, or based the assessment on incorrect facts). You lodge the objection and take it to the AAT or Federal Court if needed.
• At the same time, you’ve taken statutory action within the DPN’s 21-day window, paid, appointed an administrator, or wound up, so your personal liability is discharged.
• The company’s dispute can proceed independently, without your personal exposure clouding the decision-making.

Separate proceedings don’t work when:

• The DPN is lockdown, and winding up the company will kill the tax dispute. Liquidators often won’t pursue expensive litigation unless there’s a clear return for creditors. If the tax dispute is the company’s only asset, you might lose the chance to fight it.
• Your personal liability is locked in, and the ATO is pursuing you before the tax objection is resolved. At that point, you’re defending two fronts with no breathing room.
• The tax dispute is weak or speculative. If the objection has little chance of success, using it as a shield for the DPN is a mistake. Courts see through tactical objections, and the ATO will push back hard.

The key question: does disputing the tax debt improve your position on the DPN, or are they genuinely independent?

If the tax debt is wrong and you can prove it, that’s a strong foundation for arguing you took reasonable steps or that the penalty should be remitted. If the tax debt is arguable but not clearly wrong, the two disputes might be better handled separately, satisfy the DPN to avoid personal risk, let the company fight the debt on its merits.

This is where commercial judgement and legal strategy overlap. The decision depends on your appetite for risk, the strength of the tax case, the company’s financial position, and your personal exposure.

Get advice early. The wrong call in the first week can lock you into years of litigation.

What to Do Monday Morning: Immediate Steps for Directors

You’ve just received a Director Penalty Notice. The company’s tax debt is already under objection, or you believe the debt is wrong. What do you do right now?

Step one: Confirm exactly when the 21-day clock started. Check the date of service, not the date the notice was issued. If there’s any ambiguity about service, note it, invalid service is a defence, but you need evidence.

Step two: Call your lawyer. Not your accountant, not your bookkeeper. A lawyer who understands DPNs and tax litigation. If you don’t have one, find one today.

Step three: Gather every document related to the underlying tax debt. The assessment, any objection you’ve lodged, correspondence with the ATO, advice you’ve received, payment records. You need the full picture before you can decide on strategy.

Step four: Assess your options within the 21-day window. Can you pay the debt and dispute it later? Can you appoint an administrator if the company is insolvent? Is the DPN lockdown or non-lockdown? Each answer changes your path.

Step five: Lodge the company’s tax objection if it hasn’t been done already. Even if you’re not sure about your DPN strategy yet, get the objection in. That clock is separate and just as important.

Step six: Write to the ATO within the first week, noting that the debt is under dispute and requesting remission of the director penalty. Be specific. Set out the grounds. Don’t just assert the debt is wrong, show why.

Step seven: If you’re confident in your defence to the DPN itself, such as arguing you took all reasonable steps, or the notice is invalid, prepare that defence now. Don’t wait until day 20. The ATO won’t extend deadlines just because you’re mid-dispute.

Step eight: Make a decision by day 14 at the latest. The final week is for execution, not deliberation. If you’re going to pay, pay. If you’re winding up, start the process. If you’re fighting, file your defence.

These steps won’t guarantee you avoid liability. But they’ll give you the best chance of managing both disputes without one collapsing the other.

The Right Lawyer Won’t Just Handle Your Case, They’ll Give You Clarity

Facing a Director Penalty Notice while disputing the underlying tax debt is one of the most high-pressure situations a director can encounter. The timelines are tight, the stakes are personal, and the regime is unforgiving.

Can you dispute both at the same time? Yes. But it requires sharp strategy, immediate action, and a clear understanding of how the two regimes intersect.

The ATO doesn’t care if you believe the debt is wrong. They care whether you’ve taken the statutory steps to avoid personal liability within 21 days. If you want to challenge both the DPN and the tax debt, you need to manage both tracks simultaneously, lodging objections, requesting remissions, and taking action to discharge your personal exposure.

Get it wrong in the first week, and you’ll spend years fighting uphill. Get it right, and you protect yourself while giving the company the chance to prove the debt was never payable in the first place.

This is not an area for delay or half-measures. If you’re facing this situation, the time to act is now.

Important: This article provides general information only and does not constitute legal advice. Director penalty notices and tax disputes involve complex legal issues that depend on your specific circumstances. You should obtain professional legal advice before taking any action in relation to a DPN or tax debt dispute.