DPN - Saving the Family Home

saving the family home

Director Penalty Notice – Bankruptcy – Saving the Family Home

A Director Penalty Notice (DPN) is issued by the ATO to recover outstanding company debt from the director(s).
DPNs are a ticking time bomb, 21 days from being issued the window closes for the director to avoid personal liability.

Dealing with a DPN Debt
A DPN liability is resolved if it is paid by the director or the company. If there are multiple directors, the liability is joint and several.
If the director is unable to pay the DPN debt or enter an affordable repayment arrangement with the ATO, then a Debt Agreement or Bankruptcy may be necessary to deal with the debt.
A Debt Agreement can be entered into by creditor’s vote. The DPN liability and taxes owing to the ATO are caught by a Debt Agreement. Information on how a Debt Agreement works.
Bankruptcy is entered into without the involvement or knowledge of creditors. The DPN liability and all taxes owing are extinguished by bankruptcy.
For the client, it comes down to the individual’s circumstances as to whether a Debt Agreement or Bankruptcy gives the best solution. Nicholls & Co provides guidance on the pros and cons of each alternative for a client’s specific circumstances.

TAKE CARE: It is highly dangerous for a person to become a director of an existing company. The new director could become exposed to receiving a DPN for past taxes owed by the company. Persons considering becoming a director of an existing company should first obtain independent professional advice from their Solicitor and Tax Accountant.

Debt Agreements and Saving the Family Home
A Part 9 Debt Agreement is a legally binding way of compromising and marshalling unsecured debt into a binding arrangement for payment over future years. A Debt Agreement protects the family home by ensuring the debt is paid from future cash flow.

Bankruptcy and Saving the Family Home
The family home can be saved if the company director files for bankruptcy. Depending on the circumstances, bankruptcy can be a better alternative to a Debt Agreement for saving the home as it frees up the bankrupt person’s income for living and allows the co-owner to have a clear focus for maximising funds available to save the home.
For clarity, we make the following observations/comments regarding jointly owned properties and bankruptcy:

  • Upon becoming bankrupt, that person’s interest in the family home vests in the bankruptcy estate. The co-owner continues to own his or her share of the home.
  • Like all people who own a property jointly, the trustee cannot sell the family home from under the co-owner and cannot make decisions regarding the property without the involvement and agreement of the co-owner.
  • If company debt is secured against the house, it may be able to be applied against the bankrupt person’s share of the property. This depends on what has transpired regarding business structure, loans and security provided but should be checked as it could possibly make it easier for the co-owner to save the family home.

What happens to the family home when the company director becomes bankrupt with Nicholls & Co:
The trustee will seek to establish good communication with the co-owner and discuss whether the co-owner wishes to retain the family home. The family will continue to live at the property. If the co-owner wishes to retain the family home, there are many options for how this can happen. As a guide, we give the following examples:

  • If the property displays no equity, the co-owner can save the family home by purchasing the trustee’s equitable interest in the property. This involves the co-owner making payment to cover the trustees’ costs for the transfer of the trustee’s interest in the property to the co-owner. The transaction is documented by a Deed.
  • If the property displays some but not significant equity, the co-owner can save the family home by purchasing the trustee’s equitable interest in the property. For example, if the property has $40,000 equity, the bankrupt estate’s half interest in the home would be $20,000. The co-owner buys the bankrupt estates interest in the property for $20,000. The payment can be by an interest-free payment plan over three years. The transaction is documented by a Deed.
  • If the property displays significant equity, we will encourage the co-owner to explore all options for the property to be saved. Foe example, this may involve:
    • The bankrupt person proposes a Part 4 Composition to enable an orderly payment arrangement for the house to be saved.
    • Family supporting the co-owner to buyout the interest of the bankrupt estate.
    • The co-owner applying for a loan to buy out the interest of the bankrupt estate using the co-owners share of equity in the property. While the bankrupt person cannot join the loan application, the bankrupt’s income can be included in the household income.
    • If able, the bankrupt person can access protected funds to buy out the interest of the bankrupt estate. For example, if the bankrupt person can access his or her super – these monies can be used to save the house.
      NOTE: Only super funds accessed once bankrupt are protected.
    • If able, the co-owner accessing super funds to buy out the interest of the bankrupt estate.

We highly recommend that the co-owner discuss all options with the Trustee before deciding how the family home will be saved.

ASSISTANCE:
Should any of your clients have ATO debt that they just cannot pay, we welcome your enquiry for our independent, creditable advice. Call 1300 794 492  or email: helpdesk@nichollsco.com.au