Does a DPN lead to bankruptcy?

The path from a DPN to bankruptcy

Bankruptcy does not follow directly from a notice. The usual sequence is:

1. The 21 days pass without payment or, for a non-lockdown penalty, a formal appointment. The penalty is now enforceable against you personally.
2. Offsets. The ATO applies any tax refunds or credits you are owed against the penalty.
3. Garnishee notices. Without a court order, the ATO can direct your bank, your employer or people who owe you money to pay it instead. The garnishee notice page explains how far this reaches.
4. Court judgment. The ATO sues for the debt. Directors rarely have a defence at this stage unless one of the statutory DPN defences applies.
5. Bankruptcy notice and petition. With a judgment in hand, the ATO can serve a bankruptcy notice and, if it is not met, ask the court to make you bankrupt.

The ATO does use this path, and it can make you bankrupt. But it is slow, it costs the ATO money, and at every step a payment plan or genuine engagement usually pauses it. Most director penalties are resolved by payment, a plan, or an insolvency appointment long before a petition is filed.

What bankruptcy does to a director penalty

If it does get that far, a director penalty is a provable debt in bankruptcy. It is generally released when you are discharged, usually after 3 years and 1 day. During the bankruptcy, tax refunds for earlier periods go to the trustee, and you cannot act as a company director. Assets above the protected thresholds, including a share of the family home, can be sold. Whether the ATO can take your house depends on equity and ownership, not on the type of debt.

Bankruptcy is sometimes the right answer for a director with a large lockdown penalty and no realistic way to pay. It is rarely the right first answer. The bankruptcy and tax debt page covers what is released and what is not.

How to avoid it

In rough order of how early they apply:

• Inside the 21 days. For a non-lockdown penalty, the company paying, or entering administration, restructuring or liquidation, remits the penalty entirely. This is the cleanest exit and it disappears on day 22.
• A payment plan on the personal liability. The ATO will consider a payment plan for a director penalty. It does not remit the debt, but a plan that is kept usually stops garnishees and court action.
• A defence. Narrow, but real: illness, all reasonable steps, or a reasonably arguable position on SGC or GST.
• A personal insolvency agreement or debt agreement. Formal alternatives to bankruptcy that can include a director penalty, with different consequences for your assets and your ability to be a director. Worth understanding before the ATO chooses for you.

What to do next

1. Find the posting date on the notice and work out where you are in the 21 days.
2. If the penalty is non-lockdown and the company cannot pay, get advice on a formal appointment before day 21.
3. If the penalty cannot be remitted, put a realistic payment plan proposal to the ATO before any garnishee or court step.
4. If the amount is beyond any plan, speak to a specialist about personal insolvency options, including alternatives to bankruptcy.

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