ATO’s current approach to debt collection will change

The ATO paused debt collection to bushfire impacted communities in late 2019, and then extended this across the entire population from March 2020 in response to Covid-19. According to a report by the Inspector-General of Taxation in June 2021, the ATO reported collectable debt levels reaching an eye-watering $34 billion, with small business taxpayers accounting for more than 62% of the debt with an average of $176k per debt account.

With expectations that the economy will roar back from its Covid slumber, it is also expected that it will not be a matter of if but when the ATO will begin shoring up its balance sheet.

In this article, we broadly discuss the Director Penalty Regime (DPR) which is one of the strongest tools that the ATO has used to encourage payment of outstanding debts and improve tax reporting behavior.

What is the Director Penalty Regime?

The reporting and payment obligations of taxation debts do not only rest with current directors, but also with new and former directors who need to be aware of certain pitfalls. Whilst there are various nuances as to how the DPR operates, in simple terms, if a company does not meet its pay as you go (PAYG) withholding, net goods and services tax (GST) or superannuation guarantee charge (SGC) obligations, the ATO may recover these amounts from directors of companies personally. Provided certain criteria are met, the ATO may issue a director penalty notice (DPN) whereby a director will have 21 days from the date on the notice to act upon it rather than from the date it is received through the snail mail.

There are two types of DPNs which directors need to be aware of: A Non-Lockdown DPN and a Lockdown DPN – no pun intended.

Non-lockdown DPN may be issued to directors who have reported the company’s PAYG and net GST within 3 months of due dates but have remained unpaid as well as in relation to the unpaid amount of the SGC obligations which are reported by the due date of the SGC statement. The directors have an opportunity to avoid personal liability if they, within 21 days from when the notice is given, either pay the debt or appoint an insolvency practitioner to either restructure the debts or liquidate the company.

A Lockdown DPN may be issued when PAYG and net GST are reported more than 3 months after the due date as well as the unpaid amount of the SGC liability which has been reported after the due date. The only option to avoid personal liability is to pay the debts within 21 days of the date the DPN is given. Inability to pay these obligations may lead to a potential personal bankruptcy down the road for the directors.

Our helpful tips

Here are some of our recommendations:

1. Before you become a director of a company check for any unpaid or unreported PAYG withholding, net GST or SGC liabilities.
2. As a director:
   1. Take steps to have the company lodge PAYG withholding, net GST and SGC statements on time with the ATO even if you cannot pay.
   2. Check that your Director ID details are current on the Australian Business Registry Services to ensure that any DPN is issued to your current address.
3. If you cannot pay, act early and explore your options which can include:
   1. Business viability assessments with rapid implementation of improvement strategies.
   2. Restructuring debts where the underlying business model may be viable through an informal work-out or formal regimes such as voluntary administration or small business restructuring process.
   3. In severe financial hardship, consider business closure to avoid further damage by initiating an orderly winding up.

How can Charles & Co. help?

Our Team with more than 50 years combined experience is well placed to assist businesses in a range of challenging situations. We encourage anyone experiencing financial and/or operational distress to contact us to discuss your options.