Receiving a Director Penalty Notice (DPN) can be overwhelming, but acting quickly and decisively is essential to protect yourself from personal liability. The ATO issues DPNs to hold company directors accountable for unpaid tax debts, and once you’ve received a notice, the clock is ticking.
This article provides a step-by-step plan to help you navigate the process, avoid unnecessary financial repercussions, and ensure compliance with the law.
Step 1: Understand the type of DPN you’ve received
As we covered in in a previous article, there are two types of DPNs:
21-Day DPN: Provides 21 days to act and avoid personal liability.
Lockdown DPN: Imposes immediate liability, leaving no grace period for directors to respond.
How to identify your DPN type
The first clue lies in the wording of the notice. A 21-day DPN explicitly states a deadline for action, while a lockdown DPN typically notes immediate liability.
Additionally, consider the compliance status of your tax lodgements:
21-Day DPNs are issued when returns (BAS, IAS or SGC) have been lodged on time, but the debts remain unpaid.
Lockdown DPNs are triggered when returns are lodged late or not at all, locking directors into liability immediately.
Key tip: Check the date the ATO mailed the notice—this is when the 21-day period begins, regardless of when you receive or open it.
Step 2: Assess your options
Your response depends on the type of DPN issued:
If you received a 21-Day DPN
You have three main options to act within the 21-day window:
Appoint a Small Business Restructuring (SBR) Practitioner
An SBR allows your company to restructure its debts and keep trading. If successful, this clears personal liability for debts listed in the DPN.Appoint a Voluntary Administrator
If the company’s financial difficulties are more severe, a voluntary administrator takes over management of the company to assess its future and potentially work out repayment plans with creditors.Appoint a Liquidator
If the business is no longer viable, liquidation winds up the company’s affairs, selling assets to repay creditors and clearing the director’s liability for eligible debts.
If you received a lockdown DPN
Lockdown DPNs leave no room for restructuring or insolvency options. The only way to resolve the liability is to pay the debt in full. This may require:
Negotiating a payment plan with the ATO.
Refinancing assets to generate funds.
Seeking personal finance options to cover the liability.
Key tip: Consult a restructuring or insolvency professional immediately to determine the most effective response for your situation.
Step 3: Seek professional advice
Navigating a DPN without expert guidance can lead to costly mistakes. Insolvency and restructuring professionals can:
Clarify the terms of your DPN and your liabilities.
Help you appoint an SBR practitioner, administrator, or liquidator quickly.
Advise on payment strategies or alternative financing options for lockdown DPNs.
Case Study: Amanda’s quick action
Amanda received a 21-day DPN for $250,000 in unpaid PAYG debts. With professional advice, she immediately appointed a restructuring practitioner, clearing her liability and successfully reducing her company’s debts by 60%.
Step 4: Ensure proper documentation
For 21-day DPNs, the ATO requires proof of action within the deadline. This includes:
Signed appointment documents for the SBR practitioner, administrator, or liquidator.
Formal notifications to creditors or other stakeholders as required.
Ensure that all paperwork is filed promptly and accurately to avoid disputes about the timing of your actions.
Step 5: Address the root cause
A DPN is often a symptom of deeper financial or operational issues within the company. To prevent future notices:
Improve cash flow management: Regularly review cash flow to ensure tax obligations are prioritised.
Enhance record-keeping: Use accounting software to track compliance deadlines for BAS, IAS and SGC returns.
Set up ATO payment plans: Proactively negotiate payment plans for any overdue tax debts.
FAQs about responding to a DPN
Q: Can I negotiate a payment plan with the ATO to clear a 21-day DPN?
No. While payment plans are a valuable tool for managing company tax debts, they do not stop personal liability under a DPN.
Q: What if I don’t receive the DPN on time?
The 21-day period starts from the date the ATO mails the notice to your ASIC-registered address, not when you physically receive it. Keeping your ASIC address up to date is critical.
Q: What happens if I miss the 21-day deadline?
If you fail to act on a 21-day DPN within the window, you are automatically personally liable for the debts listed. The ATO may then take enforcement action against your personal assets.
Real-life example: What happens when you ignore a DPN
Tom was the director of a tech startup that struggled with cash flow issues. When Tom received a 21-day DPN for $180,000 in unpaid GST, he assumed a payment plan could resolve the issue and delayed action. By the time he sought advice, the 21-day period had expired, and Tom was personally liable for the full debt.
With no option to restructure or liquidate, Tom had to sell personal assets to cover the liability.
Lesson: Acting promptly is the only way to avoid personal liability under a 21-day DPN.
Key takeaways
Responding to a Director Penalty Notice requires urgency and precision. Whether you’ve received a 21-day DPN or a lockdown DPN, taking the right steps quickly can protect your personal financial future.
If you’re unsure how to proceed, Business Reset can help. Our team specialises in small business restructuring, liquidation, and DPN solutions. Contact us today for expert advice tailored to your situation.
Coming soon: Director liability explained: How a DPN affects you personally
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