Director Penalty Notice? Stop the clock ticking

Maybe you’re concerned that a Director Penalty Notice (DPN) is on its way to you from the Australian Taxation Office (ATO)? 

Or perhaps you’ve already received one? Either way, it’s not a good feeling knowing you have a tax debt clock that’s ticking. Relentlessly ticking.

The RSM Restructuring & Recovery team is receiving a growing number of enquiries from Directors around Australia who are facing financial uncertainty. It’s a tough time for many - financially and mentally.

According to SmartCompany, “The ATO issued more than 23,000 DPNs to individual company directors in the 2022-2023 financial year, covering more than 17,000 companies.” Currently, it’s been reported the ATO are issuing an average of 60 DPNs per day. So if you have concerns about a DPN, or other financial difficulties, you aren’t alone.

We spoke to Jerome Mohen, RSM Partner, Restructuring & Recovery and Shannon O’Connor, Senior Manager, Restructuring & Recovery, to get their insights and general tips around what people should do if they have a DPN clock ticking.

Why is a DPN a significant tool for the ATO to prompt people to engage swiftly on outstanding tax debts?

“Essentially things start to get personal. A DPN breaks through company debt implications and starts to hit Directors at a personal liability level. That's when people start thinking about, and fearing for, their family home, for example,"

Shannon commented: “For good reason - the potential loss of the family home is a big trigger point for people to act on outstanding tax debts. Directors who have been issued a DPN generally have 21 days to make payment of the debt or appoint an external administrator to the company - otherwise they're personally liable. So the consequences of not engaging are significant.”

What human behaviours do you commonly see when it comes to financial distress?

“The common theme is that people will try and resolve everything before they come to us, which generally means that they have expended all their cash and the options left available to them may be more limited,” Jerome said.

“People also seem to typically want to avoid paying costs now, or solving debt issues proactively in order to keep their cash flow going week to week - but this approach can often end up costing them a lot more in the long run.

Equity levels in assets, including businesses and personal homes, can also change during drawn-out, financial distress situations and this has implications. The financial and mental burden of ‘going it alone’ can be crippling.

We know from experience that the earlier people engage, the more likely a range of options will be on the table for their consideration,” Jerome said.

If personal bankruptcy is the outcome, how can people regain some control over their destiny?

Shannon explained: “By reaching out to a registered trustee, by having that tough conversation, you can go into the situation understanding the process and understanding your options. Unfortunately, we are involved in a lot of bankruptcy situations where someone has been made bankrupt, involuntarily, and they’re devastated and confused about what’s going to happen next.

They’re having to deal with it after the fact, whereas if you reach out proactively and be transparent about where you are at - the next steps will become clear and you’ll regain some control of a difficult situation quickly.

If bankruptcy does indeed become the outcome, you're the one calling it. You've met the person you're comfortable going through the process with. If things have felt out of control for some time, it can provide a huge level of comfort to people knowing that they’ve made the decision, there will be a definite outcome; a line drawn in the sand,”

When a financial distress situation is resolved, and the ATO tax debt clock stops ticking, do people then have the ability to move forward with their lives?

“It's a powerful moment. A lot of people aren’t aware that bankruptcy releases them from most debts, allowing them to move forward. Their future may look different to what they’d envisioned and they may have to relinquish assets along the way, but they gain certainty again - and that’s worth a great deal.

Knowing that you will no longer be constantly chased by creditors to be paid, and not having to worry about how you're going to make that next interest repayment; it can be life-changing for people, really empowering,”

“Once people have actually dealt with their debt issues and no longer have to pay all the default payments that they were previously, they can potentially live a much more predictable, stress-free life on the financial front,” he said.

Shannon added: “It’s really common for people to say to me that they wish that they’d reached out sooner and started the bankruptcy process earlier. Financial distress costs people a lot more than just money - it’s the emotional stress that can be a huge burden to carry too.”

View this personal insolvency story from a Director, and RSM client

Whether you have a DPN on your desk now, or are just generally concerned about your financial viability; we’re here to help.

If you or anyone you know needs mental health support, please contact:

• Lifeline on 13 11 14
• Beyond Blue on 1300 224 636
• Headspace on 1800 650 890

FOR MORE INFORMATION

Our experienced team can help you understand your options, so you can make informed decisions. Contact us for a free, initial call.