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Receiving a Director Penalty Notice (DPN) from the Australian Taxation Office is a serious matter and acting quickly is essential.
A DPN allows the ATO to pursue a company director personally for certain unpaid company tax and superannuation liabilities, including PAYG withholding, GST and Superannuation Guarantee Charge (SGC).
If you have received a DPN, the first step is to identify whether it is a lockdown or non-lockdown DPN and check the date it was issued. Depending on the circumstances, you may have only 21 days from the date the notice was issued to take action.
The options available will depend on your company's lodgement history, the type of DPN you have received and your broader financial circumstances.
Getting professional advice early can help you understand your personal exposure and determine the most appropriate next step.
What is a Director Penalty Notice?
A Director Penalty Notice is a formal notice issued by the ATO that enables it to recover certain unpaid company tax and superannuation liabilities from a director personally.
Director penalties can apply to unpaid:
- PAYG withholding (PAYGW)
- Goods and Services Tax (GST)
- Superannuation Guarantee Charge (SGC)
Receiving a DPN does not necessarily mean your company must immediately enter liquidation or that you will become bankrupt. However, ignoring the notice can significantly reduce the options available to you.
Lockdown vs non-lockdown Director Penalty Notices
One of the first things to establish is what type of DPN you have received.
Non-lockdown DPN
A non-lockdown DPN generally relates to liabilities that were reported to the ATO within the required timeframes but remain unpaid.
Depending on your circumstances, action taken within the 21-day period may allow the director penalty to be remitted. Options may include:
- paying the outstanding amount
- appointing a voluntary administrator
- appointing a small business restructuring practitioner
- commencing the process of winding up the company.
Lockdown DPN
A lockdown DPN generally arises where relevant company liabilities were not reported within the required timeframes.
With a lockdown DPN, appointing an administrator, restructuring practitioner or liquidator does not remove the director's personal liability. Payment of the relevant liability is generally required to remit the penalty.
This makes timely lodgement of tax and superannuation obligations particularly important — even where a company cannot immediately pay the amounts owing.
Whether you have received a non-lockdown DPN, or a lockdown DPN advising that you are now personally liable for outstanding business tax debt, it’s important not to ignore it.
Although we would always hope to be able to help a company before it reaches this point, our approach remains the same…
A 3-phase approach to regaining clarity and control
Understand your options
Assess the DPN, company debts, viability and available restructuring or insolvency pathways.
Depending on your circumstances, options may include restructuring the business, negotiating with creditors, voluntary administration, Small Business Restructuring or liquidation.
Every engagement with RSM’s restructuring and recovery team, whether formal or informal, starts with a conversation. We need to understand the problem so we can determine the options available to you. Through further engagement, we then map out these options and use them to develop a strategy for moving forward.
Address the company debt
Understand your personal exposure
Implement the most appropriate strategy for the business, which may include restructuring, administration or liquidation. Where director penalties have become personal liabilities, separate strategies may need to be considered to manage the director's personal financial position.
Once a strategy is agreed on, we work with you to implement it. In the case of restructuring the business, this might include negotiating with creditors, streamlining operations, selling non-core assets, and exploring funding options. In administration, it might mean that we step in to manage the business for a period. In the case of insolvency, you may appoint our registered liquidators and we will commence the process of winding up the business and negotiating with your creditors.
Deal with personal exposure
Where director penalties or personal guarantees remain, consider the options available for managing those liabilities. Business insolvency and personal liability can overlap. It is important to understand both the company's position and your own exposure before deciding what to do next.
Sometimes, actions taken in phase 2 to help the business recover mean that a non-lockdown DPN no longer applies. Tax debt is settled, and the business can continue its recovery. In situations involving a lockdown DPN and subsequent liquidation, directors must remember that the DPN they received still applies.
How we help directors deal with a DPN
Our ability to assist with a DPN depends on whether we have acted as administrators or liquidators in the wind up of the business. If we have, we cannot directly act on your behalf to resolve your DPN. It’s purely a conflict of interest issue; if we act for your business debt, we cannot act for your personal debt and vice versa.
However, we can and do continue you to support you by:
(a) making sure you are aware of the ongoing DPN
(b) helping you understand your options to devise a strategy to address it
(c) connecting you with trusted professionals who can provide the services you will need
If we have not acted as administrators or liquidators for your business, our registered trustees can help you resolve your DPN. What this looks like depends on how much you owe and your personal circumstances. Some of the possible options include…
Informal agreements – This is where we help you negotiate payment plans or deals with the tax office and any creditors with whom you have a personal guarantee for outstanding debts. Informal agreements are generally useful when debt amounts are low and/or there are few creditors.
Personal insolvency agreement (PIA or Part X) – For larger debt amounts (typically over $100K), where you may wish to keep your home and avoid bankruptcy, a well-structured personal insolvency agreement can provide a valuable alternative to bankruptcy. In these cases, you appoint us as a personal controlling trustee and we assist you to propose a binding agreement with all your creditors (including the ATO). Repayment can take the form of a lump sum with support from a lender or a third party, repayments over a period of time, or a mix of both.
A PIA provides certainty because they ensure all known and unknown creditors with claims or even personal guarantees are captured, and cannot pursue you in the future.
Bankruptcy – When you owe a lot of money or repaying what you do owe is impossible, bankruptcy is often the quickest and most cost-effective solution. It's usually not as daunting as people fear, and provides a path to resolution so you can move forward with life. There are even still ways to explore saving the family home. If you jointly own your home, the co-owner might be able to buy out your share in the home which then allows your family to retain the property.
The most important thing is not to ignore it.
- Check the date on the notice
The 21-day period runs from the date the DPN is issued, rather than simply giving you 21 days from when you happen to open or read it. - Determine whether it is lockdown or non-lockdown
Your company's BAS, IAS and SGC lodgement history will help determine the type of DPN and therefore which options remain available. - Understand your personal liability
Determine exactly which company liabilities are included in the DPN and whether there are other personal exposures, such as personal guarantees or other company debts. - Review the company's position
A DPN is often a sign of wider financial pressure. Consider whether the business remains viable and whether restructuring, voluntary administration or liquidation may need to be considered. - Seek professional advice immediately
The right response depends on the type of DPN, company lodgement history, financial position and your individual circumstances. Early advice gives you more time to assess those options before statutory deadlines expire.
Ignoring a DPN does not make it disappear.
Once the relevant period has expired, the ATO may take recovery action against you personally. Depending on the circumstances, this can include:
- garnishee notices
- applying personal tax credits or refunds against the debt
- legal recovery proceedings
- ultimately, personal insolvency or bankruptcy proceedings.
This is why it is important to seek advice as soon as a DPN is received rather than waiting for further ATO enforcement action.
An ATO payment arrangement should not be assumed to remove your liability under a DPN.
A payment plan may form part of a broader strategy for managing the debt, but entering an arrangement does not necessarily remit the director penalty itself.
If you have already received a DPN, seek advice on how any proposed payment arrangement affects your personal liability before relying on it as your solution.
There are limited statutory defences that may apply to a Director Penalty Notice depending on the circumstances.
These can include circumstances where a director was unable to participate in the management of the company because of illness or another acceptable reason, or where the director took reasonable steps to ensure the company complied with its obligations or entered an appropriate insolvency process.
DPN defences are highly dependent on the facts and supporting evidence. Directors considering a defence should obtain specialist advice promptly.
RSM's restructuring and insolvency specialists can help you:
- understand whether your DPN is lockdown or non-lockdown
- assess your company's financial position
- identify restructuring and insolvency options
- understand your potential personal exposure
- consider options for dealing with personal debt where liability has already crystallised
- connect you with appropriate legal or other specialist advisers where required.
Where RSM has acted as administrator or liquidator of the company, professional independence and conflict requirements may affect the personal services we can provide to the director. In these circumstances, we can help you understand the issue and connect you with appropriate professionals.
Yes. A company can enter liquidation after a DPN has been issued, but whether this removes the director penalty depends on the type of DPN and when action is taken.
For a non-lockdown DPN, beginning to wind up the company before or within the relevant 21-day period may result in the director penalty being remitted. However, liquidation will not remit a lockdown DPN, meaning the director can remain personally liable for the debt.
Because the outcome depends on the company's lodgement history and timing, directors should seek advice before deciding on liquidation.
Small Business Restructuring (SBR) may be an option where an eligible business is experiencing financial difficulty but remains viable.
For a non-lockdown DPN, appointing a Small Business Restructuring practitioner before or within the relevant 21-day period may result in the director penalty being remitted. However, SBR will not remove personal liability where the penalty has already become locked down.
The suitability of SBR will depend on the company's financial position, eligibility and the status of the DPN.
Potentially, yes. Resigning as a director does not automatically remove liability for company tax and superannuation obligations that arose during your time as a director.
Former directors can remain liable for penalties relating to liabilities that were due before they resigned and, in some circumstances, liabilities that fall due after their resignation but relate to a reporting period during which they were a director.
If you have recently resigned and the company has outstanding ATO liabilities, it is important to understand whether you may still have personal exposure.
A DPN can create a personal liability for the director, which means the ATO may pursue the director personally for the outstanding penalty.
Recovery action can include garnishee notices against bank accounts or amounts owed to you, offsetting tax credits against the debt and commencing legal recovery proceedings.
Receiving a DPN does not automatically mean you will lose your home or other personal assets, but ignoring the notice can increase the risk of personal recovery action. Seeking advice early can help you understand your exposure and the options available.
Could you be held personally liable for your company’s tax debt?
Director Penalty Notice assessment tool
By completing this assessment, you will gain insight into your potential personal liability for your company's tax debts and receive clear guidance on the necessary next steps.
Received a DPN? The clock may already be running
Act now if you have received a DPN
It’s vital to note that once you receive a lockdown DPN, any financial issues your business was facing have now become a personal issue too. While your trusted advisor cannot help you resolve both, they should always be looking at your situation holistically to ensure you have maximum clarity across the full spectrum.
Ideally, if your business is on a trajectory towards insolvency, get advice now. At RSM, even if we’re not the best fit for your situation, we will always be able to recommend other sources of support that may be. This is even more critical if you have received a non-lockdown DPN, as the advice you get may help you avoid becoming personally liable for your business debt.
If you have received a lockdown DPN, or are dealing with a DPN from a business that was wound up months (or even years) ago, it’s time to face it head on. As the ATO continues with its determination to recover outstanding debt, your ability to resolve the debt on your terms will diminish the longer you wait.
Reach out to us, have a chat about your options, and then decide what you want to do. Taking the first step towards regaining clarity and control could be the best decision you make for your business, yourself, and your future.
YOUR LOCAL DPN ADVISER
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Received a DPN?
The 21-day period is calculated from when the DPN is issued. Seek professional advice immediately to understand which options remain available.
Received a DPN?
The 21-day period is calculated from when the DPN is issued. Seek professional advice immediately to understand which options remain available.
