Updated: Feb 8, 2021
In a recent article on Smart Company, it was reported that although small businesses are ‘doing it tough’, the Australian Tax Office is continuing its aggressive pursuit of businesses.
From November 2016 to June 2017, 46% of all wind-up order applications for companies came from the ATO. Although the number of ATO instigated wind-ups are down from when they started their campaign to recover revenue owing to the government, there is no doubt that the ATO is maintaining its aggression when pursuing companies which don’t address unpaid debts in due time.
So what can a business expect if they have an ATO debt which hasn’t been addressed?
After the escalation of receiving demand letters and possibly having a collections agency trying to recover the debt, there are a number of actions the ATO can take against the business which could present a significant issue for the business or for the director of the company.
From 1 July 2017, the ATO has the power to disclose to Credit Reporting Bureaus the tax debt information of businesses that have not effectively engaged with the ATO to manage those debts. It initially applies to businesses with an ABN and a tax debt of more than $10,000 that is at least 90 days overdue.
As defaults are being recorded on the taxpayer’s commercial credit file, the implications for the business and the director of the company can include this black mark on their credit file lasting for five years and affecting their ability to access finance from banks or credit from suppliers.
Since 2015, there has been an increase in garnishee notices issued by the ATO. The notice is issued to either a person or business that holds money for that business or individual and it compels them to make payments, either as a percentage of income or as a lump sum, directly to the ATO to reduce the person or business’s debt.
In the case of businesses, garnishee notices can be issued to financial institutions, including banks, trade debtors or suppliers of merchant card facilities. Not only can it be an immediate payment of cash to the ATO, unlike payments made under a payment arrangement with the ATO, these payments are not considered to be preferential should the business be forced to take insolvency action within 6 months of the payment being made.
Directors Penalty Notice (DPN)
A DPN is a Notice that the ATO can send a director that can make that director personally liable for two types of tax debts of a company - Pay As You Go (“PAYG“) and Superannuation Guarantee Charge (“SGC“) liabilities. There are two types of Director Penalty Notices.
The first is the traditional Director Penalty Notice which gives a director 21 days to take certain actions to avoid personal liability. These actions include: • cause the company to pay the debt; or • put the company into Liquidation; or • put the company into Voluntary Administration; or • Come to a payment arrangement with the ATO.
The second type of DPN, often referred to as a “Lockdown DPN”, can make a director automatically personally liable for PAYG and SGC if company returns are not lodged on time – there is no opportunity to avoid that liability once the DPN is served on the director.
Creditors Statutory Demand (CSD) & Winding Up
A CSD provides the company 21 days to satisfy the debt, otherwise the company is deemed to be insolvent. It can only be issued when there is no dispute over the debt. Normally this requires the creditor to have a Default Judgement, however in the case of the ATO, because the taxpayer self reports their liabilities, there is usually very little argument over the debt. Therefore, the ATO does not go to court to get Default Judgement.
Upon expiry of the CSD, the ATO can make a Winding Up application. Once a Winding Up application has been made, the directors and shareholders are unable to appoint a liquidator voluntarily.
When a Winding Up application is on foot, even if a deal is done with the petitioning creditor to withdraw a Winding Up application, any other creditor can ‘piggy back’ the Application and continue through to liquidation. This occurs, in particular, with other government agencies such as WorkCover or the Office of State Revenue.
Clearly, if a business has unpaid tax liabilities, there has never been a more important time to engage with the ATO to manage their situation. Ignoring the ATO is a thing of the past.