From dream to dilemma: When the DPN lands

We have observed a trend that grew out of COVID, of individuals transitioning to business ownership. We recognised that for many Australians, the idea of leaving a stable job to start a small business is a romantic one.

The dream of being your own boss, setting your hours, and building something meaningful from the ground up or buying that business that you had always admired is deeply appealing, especially mid to later in life, when experience and confidence are at their peak.

But for a growing number of mid to late-career business owners, that dream is colliding with a much colder reality. Now, 2-4 years on, some of those small business owners underestimated the true cost of running a business, physically, mentally, and financially, and common struggles we regularly hear are:

• Difficulties absorbing price increases, with rent, insurance, wages, utilities, and supplier payments quickly adding up.

• Struggled to adapt to industry changes and or competitor behaviour.

• Key staff member left following the business takeover, or general inability to hire staff at the right price.

• The business is experiencing a shift in the clientele/ lower foot traffic, and a reduced average spend.

• Compliance requirements were underestimated, both in terms of cost and time critical nature, with compliance consuming hours.

The pressure mounts fast, and what was once a passion project becomes a daily financial juggling act.

The cost of going solo

The tax trap

Tax debt is one of the most common and devastating challenges faced by small business owners. Without the automatic PAYG deductions associated with traditional employment, and often overlooking their responsibility to collect GST on behalf of the ATO, combined with the pressing need for cash flow to cover operating expenses, many small business owners neglect to set aside necessary funds. Consequently, many fall behind on their obligations to the ATO, leading to an accrual of debt and an increased risk of receiving a Director Penalty Notice (DPN).

A DPN is more than a warning; it is a legal demand. For many directors, it marks the beginning of significant financial stress and uncertainty. Receiving a DPN can be overwhelming and serves as a stark reminder that the ATO requires payment regardless of a business's struggles. If prompt action is not taken within 21 days of the issuance of a DPN, directors become personally liable for the company's tax debt owed to the ATO.

If your clients find themselves in this situation, assure them they are not alone. The ATO continues to heavily utilise DPNs as an effective debt collection tool, with 26,702 Director Penalty Notices issued in 2024 alone. While official figures for 2025 have not been released, observations indicate that the ATO's intensified focus on debt collection has maintained high levels of DPN activity.

At Worrells, our Principals are increasingly dedicating their time to guiding directors through the complex landscape of tax debt solutions, whether it's responding to a Director Penalty Notice or addressing significant tax liabilities that could soon trigger one.

The most effective outcomes are achieved when directors act early. By seeking professional advice before a DPN arrives, you are not bound by the 21-day notice period under the DPN, you will retain greater control and may be able to explore a wider range of solutions to resolve the tax debts.  

We talk to directors about the need to comply with the Director Penalty Notice to avoid that personal liability by acting upon one of the 4 options provided on the notice as follows:

Our advice is consistently tailored to deliver the best possible outcome for all stakeholders, based on the financial position of the business.  Over the past 6-9 months, many businesses have been well suited to implement c) the Small Business Restructure as the primary strategy, followed by d) liquidation.

Finding a Way Forward

The Small Business Restructuring (SBR) process offers a practical and supportive pathway for financially stressed businesses to regain stability and continue operations. Some of the key benefits we have achieved for business owners include:

1. Significant Debt Reduction, with some businesses reducing their total debts owed to unsecured creditors, including the ATO, by thousands of dollars.

2. Cessation of interest charges, easing the financial burden.

3. Directors continue trading their business throughout the SBR process, remaining in control, managing customer and supplier relationships, and staff retention.

4. Protection from debt enforcement during the SBR process, including wind-up applications and personal guarantee enforcement.

5. Breathing space to implement a viable restructuring plan.

6. Improved creditor return compared to liquidation.

7. Cash flow relief, through structured payment plans aligned with the company’s trading performance and projections.

8. Efficient resolution, with a 35-business-day process, simpler and faster than other insolvency appointments.

9. Preservation of business value, avoiding liquidation, maintaining market presence, brand, and position.

Clearly, the SBR process offers substantial advantages for companies, their directors, and other stakeholders. However, eligibility criteria must be met to access this process. Your local Worrells Principal will guide you through these requirements and help determine whether the SBR pathway is suitable for your client’s circumstances.

Liquidation of a company

Not every business is suited to an SBR.  Option d) Under the DPN framework, appointing a liquidator to wind up the company can be a more appropriate solution in certain circumstances.

Liquidation can be a practical and necessary step for a business facing:

1. Inability to pay debts as they fall due and payable.

2. Ongoing trading losses with no realistic path to profitability, i.e. declining sales, rising costs, loss of key customers/employees.

3. A business model that is no longer viable with limited prospects for successful pivoting.

4. Unsustainable debt levels that cannot be repaid, even over time.

5. Directors who are physically and emotionally exhausted, experiencing sleepless nights and deteriorating mental health due to the stress of operating an unprofitable business.

Prolonging the struggle increases financial and emotional strain. Creditor pressure and cash flow stress overwhelm directors, exposing them to financial and legal risks. Acting within the 21-day notice period allows directors to responsibly exit the business and avoid personal liability by appointing a Worrells liquidator for liquidation.

What if you don’t act on option a) to d) under the DPN?

Some directors mistakenly contact the ATO to request a payment plan after receiving a Director Penalty Notice (DPN). They don't realise this doesn't meet DPN requirements. Overwhelmed, they continue trading under high stress without addressing profitability issues, risking default on the payment plan and exposing personal assets to cover company debts.

Finding a way forward with good advice

We understand the emotional toll financial stress can take on small business owners; feelings of shame, fear, and confusion often stand in the way of making sound decisions.  Starting or buying a business is a courageous step, but courage doesn’t mean facing challenges alone.

If your clients are dealing with tax debt, financial pressure, or a DPN, it’s not the end; it can be the beginning of a turnaround. We regularly meet with advisors and business owners to provide tailored insolvency advice. If you have clients in need, reach out to your local Worrells Principal for support.