A Director Penalty Notice (DPN) makes a director of a company personally liable for:
- Pay As You Go (PAYG) withholding tax
- Superannuation Guarantee Charge (SGC)
- Goods & Services Tax (GST)
You cannot be made personally liable for income tax or the penalties and interest payable by the company.
There are two types of DPNs:
- Non-Lockdown DPN where the company has lodged its BAS, IAS and SGC statements on time
- Lockdown DPN where the company has failed to lodge its BAS, IAS and SGC statements on time.
Under a Lockdown DPN, you automatically become personally liable for unpaid PAYGW, SGC and GST. Under a Non-Lockdown DPN, you have 21 days to avoid personal liability. So, it is very important to continue to lodge BAS on time even where the company does not pay the amount, so you do not automatically become personally liable.
To avoid personal liability on a Non-Lockdown DPN, you must do one of the following within 21 days of the notice:
- Pay the debt,
- Appoint a voluntary administrator,
- Appoint a liquidator,
- Appoint a small business restructuring practitioner.
Where the debt cannot be immediately paid in full but you do not want to terminate the business of the company as it is still profitable then a small business restructure may be appropriate.
Small Business Restructure (SBR)
A small business restructuring practitioner can be appointed where:
- the debts of the company are less than $1 million.
- all employee entitlements due and payable have been paid; and
- the company has lodged all required tax documents
Where a SBR is undertaken, the company remains in operation and directors retain control during the restructure. Most SBRs require a payment of around 20 – 25 cents in the dollar with payment periods of generally 12 to a maximum of 36 months. Most SBR practitioners will charge a cost of approximately $18- 20,000 up front plus 10% of the offer made to creditors to act as the small business restructuring practitioner.
Further information on the SBR process can be found at Small business restructuring and the restructuring plan | ASIC. ASIC reports that where remuneration was paid to a SBR, the median remuneration paid for the overall restructuring process was $21,998 (average: $23,843). Further, the median dividend rate was 20 cents in the dollar (average: 21 cents in the dollar).
Risks of SBR
Some of the relevant risks of considering an SBR are:
- Stringent Upfront Requirements: Companies must have all employee entitlements paid and tax lodgments up to date before an SBR can commence. Failure to meet these administrative criteria leads to plan rejection or wasted cost and effort.
- Creditor Resistance: Some suppliers or landlords may be unwilling to continue supply to a business in SBR, and key creditors, especially the ATO, may reject restructuring plans if they perceive poor compliance history or insufficient returns.
- ATO Scrutiny: The ATO has grown stricter, often voting against proposals from businesses with poor lodgment/payment records, undisclosed debts, or where director conduct is questionable.
- Business Reputation: Announcing a restructure can cause nervousness among staff and suppliers, which may threaten morale, retention, and critical business relationships.
- Licence/Insurance Impacts: Appointment of a restructuring practitioner may void certain professional or business licences (such as builder’s licences in some states) or insurances, depending on the regulatory framework.
Payment Arrangement
If you do not or can not enter into a small business restructure or no do appoint an administrator or liquidator or have a lockdown DPN you can also approach the ATO to enter into a payment plan with a subsequent request to seek a remission of penalties (not guaranteed).
While the entry into an approved payment plan will stop ATO enforcement, you will remain personally liable for the amounts set out in the DPN in the event the company ultimately does not meet the terms of the payment plan.
I can advise on DPNs, small business restructures and payment plans.
