ALL REASONABLE STEPS - A DIRECTOR PENALTY DEFENCE OF A VERY HIGH BAR

The recent decision in Ostwald v Commissioner of Taxation [2026] FCA 868 highlights the challenges company directors can have in mounting a defence against a director penalty notice.

In Ostwald, the applicants sought to dispute the Commissioner’s position that the “reasonable steps” defence did not apply in relation to unpaid superannuation guarantee charge (SGC) of a company.

In summary, the statutory defence provides that a director is not liable to a penalty if they took all reasonable steps to ensure the company complied with its obligation to pay the liability or to ensure the company entered external administration.

This matter involved three quarters of SGC arising within the final year before the company entered external administration. Associated SGC statement lodgments and payments were made, albeit late. Painfully, for one quarter, the underlying superannuation guarantee was received in the employees’ superannuation funds only three days late.

The Commissioner raised default assessments and sent DPNs totalling over $4,000,000. The company objected to the underlying assessments and conceded a total liability of under $300,000 in total. The Commissioner amended the assessments to an amount over $900,000.

At that point, the directors sought to deny personal liability with a ‘reasonable steps’ submission. In support, reliance was placed on the company engaging professionals for restructuring financial assistance, renegotiating bank debt and selling assets.

The Commissioner's position was that the defence failed. The applicants then brought ‘judicial review’ proceedings alleging that the decision failed to take into account relevant considerations and took into account irrelevant ones. They also made policy arguments and attacked the reasonableness of the ATO’s position.

The Court found against the applicants.

Putting aside a procedural issue, a key aspect of the Court’s decision pertained to the alleged steps taken. The Court did not find those steps were relevant considerations for the defence because those steps focused on payment of the underlying superannuation guarantee amounts owed to workers, not in relation to the SGC which arises when SG is unpaid. Given the link of those two liabilities, such a fine point might be a bitter pill to swallow.

The applicant’s attack on the ATO’s decision-making took place before debt recovery proceedings were brought. Ultimately, in those proceedings, the applicants (as defendants) will be able to plead their defence at trial. Those proceedings will proceed through a different legal lens, being whether the defence stands up, as opposed to attacking the Commissioner’s consideration of the defence.

Nonetheless, this decision outlines the narrow scope of the reasonable steps defence. DPN defences are typically of last resort.

Smailes Krawitz assists with tax disputes with the ATO including director penalty notices.

Link to judgement: Ostwald v Commissioner of Taxation [2026] FCA 868

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