The directors who come out the other side of financial difficulty are almost always the ones who sought advice early, while options were still on the table.
Running a business in Australia right now is genuinely hard. Persistent cost pressures, tight margins, and an ATO that has shifted firmly back into enforcement mode after years of COVID-era leniency have created a challenging environment for small and medium businesses across Queensland and the rest of the country.
The numbers reflect this. According to ASIC, corporate insolvency appointments increased by more than 34% year on year in the period to May 2025.[1] At the same time, the ATO issued more than 84,000 Director Penalty Notices in FY2024-25, compared to around 26,700 in FY2023-24.[2] That is a significant escalation in enforcement activity.
This article is written for directors of viable, operating businesses who want to understand their obligations and their options before a problem becomes urgent. It is not aimed at businesses that have already ceased trading or are beyond recovery. The legal framework discussed here, particularly Small Business Restructuring, is specifically designed for companies that are still operating and capable of meeting a structured plan.
If that sounds like your business, read on: Why Directors Should Get Advice Before Things Get Critical
Quick Summary. This article covers:· What a Director Penalty Notice is and why it creates personal liability · The difference between a lockdown and non-lockdown DPN and why it matters · Warning signs that warrant early legal advice · How Small Business Restructuring works and who qualifies · Practical steps Queensland directors can take right now Received an ATO notice or concerned about your company’s tax position? Our Queensland commercial lawyers advise directors of operating businesses on their obligations and options before the situation becomes urgent. 📞 Call us on 1300 334 566 or scroll to the bottom to leave your details. |
What Is a Director Penalty Notice, and Why Does It Matter?
A Director Penalty Notice (DPN) is a formal notice issued by the ATO that makes a company director personally liable for certain unpaid tax obligations of the company. It is not a warning letter. It is a legal mechanism that transfers the company’s tax debt directly to the director as an individual.
The three types of company debt that can give rise to a DPN are:
- Pay As You Go (PAYG) withholding tax deducted from employee wages
- Goods and Services Tax (GST) collected through the business
- Superannuation Guarantee Charge (SGC) owed to employees
There are two types of DPN, and the distinction is critical.
A non-lockdown DPN is issued where the company has lodged its BAS, IAS and SGC statements on time but has not paid the underlying debt. In this situation, the director has 21 days from the date the notice is posted to take one of four actions to remit (discharge) the personal penalty: pay the debt in full; appoint a voluntary administrator; appoint a liquidator; or appoint a Small Business Restructuring Practitioner.
A lockdown DPN is issued where the company has failed to lodge the relevant returns within three months of their due date. In this case, the personal liability is immediate and cannot be discharged by entering administration or restructuring. The only way to discharge it is to pay the debt in full.
Two practical points worth noting. First, a director’s personal liability technically arises at the point the company fails to meet its obligation, not when the DPN is issued. The DPN is the ATO’s mechanism to commence recovery. By the time the letter arrives, the liability already exists. Second, the 21-day window on a non-lockdown DPN runs from the date of postage to the director’s ASIC-registered address, not from the date of receipt. A director with an outdated ASIC address may not receive the notice until the window has already partially elapsed.
Warning Signs That Warrant Early Advice
Financial difficulty rarely appears without warning. For directors who are paying attention, there are usually indicators in the months before a business reaches a crisis point. Directors who recognise these early retain considerably more control over the outcome than those who act only once the situation becomes urgent.
Indicators that warrant seeking early legal and financial advice include:
- Consistently using GST collected from customers to fund day-to-day operating costs rather than holding it for the ATO
- Falling behind on superannuation contributions for employees
- Receiving ATO correspondence about outstanding PAYG, GST or SGC obligations
- Creditors pressing for payment outside terms with the business unable to meet them
- Receiving a Statutory Demand from a creditor
- Difficulty meeting payroll
- Sustained trading losses over one or more quarters with no clear path to recovery
None of these necessarily means the business is beyond recovery. But each one is a signal that the time to seek independent advice is now, while options remain.
Small Business Restructuring: What It Is and How It Works
Small Business Restructuring (SBR) is a formal insolvency process established under Part 5.3B of the Corporations Act 2001, introduced on 1 January 2021. It was designed specifically to give small incorporated businesses facing insolvency a faster and lower-cost alternative to voluntary administration.
The defining feature of SBR is that the directors remain in control of the business throughout the process. The company appoints a registered Small Business Restructuring Practitioner (SBRP), who works with the directors to prepare a restructuring plan to put to creditors. The business continues to trade normally during this period.
If a majority of creditors by value vote to accept the plan, it is implemented. The company pays the agreed amounts over the plan period (up to three years), and upon completion is released from the remaining admissible debts covered by the plan.
The uptake of SBR has grown significantly since its introduction. ASIC data shows 448 SBR appointments in FY2022-23, rising to 1,425 in FY2023-24.[3] By the first half of FY2024-25 alone, SBR appointments represented approximately 20% of all external administration appointments nationally.[4] Of plans put to creditors, between 79% and 88% have been approved across the periods measured by ASIC.[3][4] Of plans that have been fully administered, 92% were fulfilled rather than terminated.[3]
The ATO is the major creditor in the majority of SBR cases. ASIC data indicates that in a significant proportion of appointments, the ATO accounts for more than half of the total debt. The ATO participates in the SBR process and, where the business presents a viable plan with appropriate documentation, has generally engaged constructively with the process.
Who Is Eligible for Small Business Restructuring?
SBR is only available to incorporated companies registered under the Corporations Act 2001. Sole traders, partnerships, and trusts without a corporate trustee cannot access this process. To enter SBR, the company must satisfy all of the following at the time the restructuring plan is proposed to creditors:
- Total liabilities must not exceed $1 million. This threshold includes all secured and unsecured debts but excludes employee entitlements.
- All employee entitlements, including wages and superannuation, must be paid and current.
- All tax lodgements, including BAS, GST, PAYG and income tax returns, must be up to date.
- The business must be capable of continuing to trade and meeting its operating costs during the restructuring period.
- Neither the company nor any of its directors can have used the SBR process or a simplified liquidation in the past seven years.
This is why the timing of advice matters. A business with $900,000 in liabilities and outstanding lodgements may not currently qualify, but could become eligible if lodgements are brought current before an SBRP is appointed. A business that waits until total liabilities exceed $1 million, or allows employee entitlements to accumulate unpaid, may find SBR is no longer available and that voluntary administration or liquidation are the only paths forward.
| SBR and Director Penalty Notices: the connection
Where a director receives a non-lockdown DPN, one of the four actions available to remit the personal penalty within the 21-day window is to appoint a Small Business Restructuring Practitioner. This means that for an eligible, viable business, SBR is not only a proactive planning tool. It can also be a legitimate and structured response to a DPN. Understanding this before a DPN arrives is what makes the difference between having options and running out of time. |
How SBR Compares to Voluntary Administration and Liquidation
Voluntary administration is a process in which an external administrator takes control of the company, investigates its affairs, and puts a proposal to creditors. Directors do not retain operational control during this period. The outcome may be a Deed of Company Arrangement, liquidation, or a return of the company to the directors. Voluntary administration is generally more involved and more costly than SBR.
Liquidation brings the business to an end. A liquidator is appointed to realise assets, investigate the company’s affairs, and distribute proceeds to creditors in the statutory order of priority. Directors have no control over this process.
SBR is designed for a different situation entirely: a viable, operating business that is facing insolvency but has a realistic prospect of trading through it under a structured plan. Directors remain in control throughout. The process is comparatively streamlined and cost-effective. It is not appropriate for a business that has already ceased trading or has no realistic prospect of meeting plan obligations.
Practical Steps Directors Should Consider Now
If any of the warning signs discussed earlier apply to your business, the following steps are worth taking now rather than later:
- Check your lodgement status with the ATO. Ensure all BAS, PAYG, GST and SGC statements are current. Overdue lodgements are what convert a manageable non-lockdown DPN situation into a lockdown one.
- Check your ASIC-registered address is current. If the ATO issues a DPN and it goes to an old address, you will not receive it promptly, but the 21-day window will already be running.
- Get a clear picture of your total liabilities. If you are unsure whether your business is approaching the $1 million SBR eligibility threshold, your accountant or legal adviser can help you map this.
- Take legal advice before the situation becomes urgent. The options available to a director who seeks advice early are considerably broader than those available to a director who acts only after receiving a DPN or Statutory Demand.
- Do not rely on informal payment arrangements with creditors as a substitute for understanding your legal position. An informal arrangement does not protect you as a director from personal liability under the DPN regime.
The Right Time to Get Advice Is Before You Need It Urgently
The legal framework in Australia provides genuine options for incorporated businesses facing financial difficulty. Small Business Restructuring in particular is a well-designed process that has allowed thousands of small businesses to trade through difficult periods while protecting directors and reaching structured outcomes with creditors.
Those options narrow as a business’s financial position deteriorates. The sooner a director understands the legal landscape, the more control they retain over what happens next.
At Bennett Carroll Solicitors, our commercial lawyers work with company directors across Queensland to understand their position and their options. We focus on directors who are still in control of their businesses and want to stay that way. If you would like a confidential conversation about your situation, contact our team.
Speak With a Queensland Commercial LawyerIf your business is facing ATO debt, you have received a Director Penalty Notice, or you want to understand your options before things become urgent, we can help. 📞 Call us on 1300 334 566 📧 Or leave your details below and we will be in touch.All enquiries are confidential. There is no obligation. |
Sources
[1] ASIC Corporate Insolvency Update, Issue 36 (to 31 May 2025): asic.gov.au
[2] ATO Annual Report 2024-25, Director Penalty Notices data: ato.gov.au
[3] ASIC Review of Small Business Restructuring Process 2022-24 (appointments, approval rates, fulfilment rates): asic.gov.au
[4] ASIC Corporate Insolvency Update, Issue 35 (SBR as % of all external administrations, H1 FY2024-25 approval rate 79%): asic.gov.au
[5] ATO Director Penalty Notices regime (legal framework, PAYG/GST/SGC obligations, lockdown vs non-lockdown): ato.gov.au/director-penalty-regime
[6] Corporations Act 2001 (Cth), Part 5.3B (Small Business Restructuring): legislation.gov.au
