Debt recovery has been at the forefront of the Australian Tax Office’s (ATO) agenda. If you’ve received a director penalty notice in the mail, you’re not alone.
Company directors in Australia are under increasing pressure to pay off their ATO debts. Recent studies show over 30,000 company directors have received a director penalty notice (DPN). Meanwhile, the ATO claims that small business owners owe more than $34 billion worth of debts accumulated during the pandemic.
If you’ve received a director penalty notice, you’re personally liable for the debt owed to the ATO. Fortunately, there are a few recovery options available to avoid major legal consequences.
What is a director penalty notice (DPN)?
A director penalty Notice (DPN) is a legal and binding notice from the ATO to company directors who have failed to pay their tax debt. If your company has failed to fulfil its tax obligations, you will be personally liable for it as the director, and a DPN is to remind you of your obligations.
The ATO may send you a DPN for debts related to the Pay As You Go withholding, Superannuation charges, GST, or a combination of the three. Directors who have failed to keep their lodgments updated or have not paid their debts may be flagged by the ATO and be sent a DPN.
The ATO is one of the biggest creditors for many businesses, sometimes resulting in their liquidation. ATO debts can escalate if unpaid, particularly for directors facing a slow sales period in their business or who are unaware of the debt.
It’s also common for directors who have left the company to be issued a DPN. In some cases, individuals can receive a director penalty notice decades later for old ATO debts, even after the company has been liquidated.
Traditional vs Lockdown DPNs
There are typically two types of director penalty notices – Traditional DPNs and Lockdown DPNs.
Traditional director penalty notices, otherwise known as the 21-day DPNs, state that directors have 21 days to comply with the notice. This means taking the necessary steps to respond to the notice.
Meanwhile, Lockdown DPNs hold directors instantly liable for the penalty. This notice is typically received when a company hasn’t lodged its tax or superannuation charges to the ATO and has not paid the relevant debts owed.
Director penalties shouldn’t be ignored. Failing to respond to the notice within the stipulated period can put your personal assets at risk. It can also impact you in the following ways:
- Legal action taken by the ATO, such as court proceedings
- Risk losing personal assets such as properties and cars
- Being declared bankrupt
- Being issued a garnishee notice
- Damage to business and personal reputation
What to do when you receive a Director Penalty Notice
Repay Debt
You can choose to repay your ATO debt in full or enter a payment plan with the ATO. If you are unable to pay the amount, a payment plan may seem like the best option. However, this may come with a risk, as you may have to provide a personal guarantee if the payment plan falls through.
Defend against the DPN
You may choose to defend against the DPN if you are genuinely not liable for the debt owed. However, the ATO only allows for defences to the DPN if:
- The company director was severely ill during the period and didn’t take part in company management
- The company director can prove that they took all possible and reasonable steps to comply with their ATO obligations
Voluntary Administration
Liquidation
Company directors who cannot pay their ATO debts stated in the DPN may have to begin the process of liquidating the company. This means appointing a registered liquidator to sell the company’s assets to pay off its debts.
The ATO can also force a company to enter liquidation if it hasn’t paid its debt within the 21 days in the DPN or within the due date of its negotiated payment plan.
Small Business Restructuring
Small businesses can leverage the Australian government’s small business restructuring process to assist companies in financial distress. This process is typically preferred, as it allows you to stay in control of your business compared to voluntary administration.
However, your business must meet the government’s eligibility criteria to use this process.
Key takeaway: Seek the right advice immediately
Dealing with a director penalty notice can be stressful, and there’s no one-size-fits-all solution for every company director. It’s important to have an experienced restructuring practitioner who can guide you with sound advice – whether it’s entering into a payment plan or small business restructuring.
With decades of experience in business restructuring, the team at Olvera First can offer a tailored solution to your DPN. Contact our team today to chat about how we can help you achieve a positive turnaround.
