A Director Penalty Notice (DPN) can feel like a heavy burden, especially when your business is already struggling with unpaid tax debts. But if you receive a 21-day DPN, there’s a powerful solution available: Small Business Restructuring (SBR). This process allows you to address company debts while continuing to trade, often reducing your liabilities significantly.
This article explores how SBR works, its benefits for directors facing DPNs, and the steps to take to protect your financial future.
What is Small Business Restructuring (SBR)?
Small Business Restructuring is an insolvency reform introduced by the Australian Government in 2021. It provides eligible companies with a streamlined and cost-effective way to deal with financial distress by restructuring debts.
Key features of SBR
Directors stay in control: Unlike other insolvency processes, directors retain control of the company.
Business continues trading: Your company can keep operating during the restructuring process.
Reduced debts: SBR allows creditors, including the ATO, to agree to a repayment plan that often also includes reducing the total amount owed.
SBR is particularly beneficial for addressing debts included in a 21-day DPN, as initiating the process clears the personal liability associated with those debts.
How does SBR work?
SBR follows a structured process designed to achieve a fair outcome for both the company and its creditors:
Step 1: Appoint a restructuring practitioner
A qualified restructuring practitioner is appointed to oversee the process. Their role includes:
Reviewing the company’s financial position.
Developing a debt restructuring plan.
Communicating with creditors on behalf of the company.
Step 2: Prepare a restructuring plan
The restructuring practitioner works with the company’s directors to create a formal plan outlining:
The amount the company can afford to pay creditors.
The timeframe for repayments.
The expected outcomes for creditors.
Step 3: Submit the plan to creditors
The plan is presented to creditors, who vote to accept or reject it. A majority vote (by value of debts) is required for the plan to proceed.
Step 4: Implement the plan
Once approved, the company begins repaying creditors according to the agreed terms, while continuing to trade.
Why SBR is ideal for dealing with a 21-day DPN
Clears personal liability
Starting an SBR within the 21-day window of a 21-day DPN clears the director’s personal liability for the tax debts listed in the notice—even if the restructuring plan is ultimately rejected by creditors.
Allows time to manage debts
The SBR process provides breathing room to negotiate manageable repayment terms with creditors, reducing the immediate financial pressure.
Keeps the business running
Unlike liquidation or administration, which can halt operations, SBR enables the company to keep trading and generating income during the process.
Focuses on viable businesses
SBR is designed for businesses that are fundamentally viable but temporarily unable to meet their financial obligations.
Eligibility criteria for SBR
Not all businesses qualify for Small Business Restructuring. To be eligible, your company must meet these criteria:
Liabilities under $1 million: Total debts (excluding employee entitlements) must be below this threshold.
Substantially compliant with lodgements: The company must have lodged all BAS and tax returns.
Employee entitlements paid: Outstanding superannuation and wages must be up to date.
Common challenges and how to overcome them
Challenge 1: Creditor rejection of the plan
If creditors vote against the restructuring plan, the company may need to explore other insolvency options, such as voluntary administration.
Solution: Work closely with your restructuring practitioner to create a compelling plan that offers creditors a better return than liquidation.
Challenge 2: Expired DPN
If the 21-day DPN deadline has already passed, SBR cannot clear personal liability for those debts.
Solution: Lodge tax returns promptly and monitor ASIC records to ensure notices are received on time.
Challenge 3: Complex financial issues
Companies with multiple creditors or significant cash flow issues may find it harder to develop a viable restructuring plan.
Solution: Engage professional advisors early to address financial challenges proactively.
Case Study: Resolving a DPN with SBR
The situation
Jake was the director of a construction company struggling with $300,000 in unpaid PAYG withholding and GST debts. When the ATO issued a 21-day DPN, Jake was at risk of personal liability.
The solution
Jake contacted a restructuring practitioner within the 21-day window. The practitioner developed an SBR plan offering to pay creditors 40% of the debts over 12 months, funded by improved cash flow and cost-cutting measures.
The outcome
The plan was accepted by creditors, clearing Jake’s personal liability under the DPN and enabling his company to continue trading.
FAQs about SBR and DPNs
Q: Can SBR clear lockdown DPN debts?
No. Lockdown DPN liabilities must be paid in full, as they arise from late-lodged or unlodged returns.
Q: What happens if the SBR plan is rejected?
If creditors reject the plan, the company may need to enter voluntary administration or liquidation.
Q: Can I use SBR if my business is already in a payment plan with the ATO?
Yes! Being on a payment plan demonstrates compliance, which may support creditor approval of the restructuring plan.
Key takeaways
Small Business Restructuring is a powerful option for directors dealing with a 21-day DPN. By initiating the process promptly, you can protect yourself from personal liability, restructure your company’s debts, and keep your business running.
If your company is struggling with tax debts or you’ve received a DPN, contact Business Reset today. Our team specialises in small business restructuring and can guide you through the process step by step.
Read next: Ignoring a DPN: What directors need to know about the risks
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