Updated: Feb 4, 2021
This month’s case study looks at the importance of identifying warning signs and how quickly things can change. This case involves a situation with the ATO, where events quickly spun out of the director’s control, and how getting professional advice quickly can make a massive difference.
We received a call from an accountant who attended an instalment in our de Jonge Read Seminar Series. The accountant’s client operated a small transport business through a company, working almost exclusively delivering goods for a major retailer. The company owed the ATO around $250,000 and had been honouring an agreed payment plan. The client had every intention of paying the debt in full. The payment plan had left the business with no cash buffer which meant that the director had not been paying himself a decent wage.
Now – a take home here is that this is a clear warning sign. If the director cannot consistently draw a reasonable wage, there might be an underlying problem and seeking specialist advice early can often result in identifying some options.
Unfortunately, in this case, the director was injured in an accident and unable to work. A new truck under finance was written off, with an insurance claim pending. The additional driver’s wage to cover the director’s absence, and a rental substitute vehicle whilst waiting for a settlement, effectively left the business unprofitable. The company could no longer maintain the payment plan to the ATO. The accountant contacted us on Thursday the 28th of June. A meeting was arranged for Wednesday the 3rd of July. At that time the director believed that he was personally liable for the entire tax debt of $250,000.
At the meeting, the client told us there was no way he could pay the $250,000. We explained to him that the debts of a company stay with the company, except in certain circumstances such as when a debt has been personally guaranteed. Another instance can be when there is unpaid PAYGW or superannuation.
The client then handed us a Director’s Penalty Notice (DPN) he had received on Friday the 28th of June for $80,000. The notice was dated the 24th of June.
A key take home here is to make sure your clients have the correct residential address noted on ASIC records. This is where DPNs get sent, not to the address on the tax return. In this case, the client had at least received the notice.
When we reviewed the DPN we found it contained both “non-lockdown” and “lockdown” components, the difference being whether the PAYGW and superannuation were reported within the prescribed timeframes.
So, the message here is – make sure all PAYGW and superannuation is reported within the required timeframe whether this liability can be paid at the time or not. This will mean any penalty under a DPN is a “non-lockdown”.
So, how is a non-lockdown DPN extinguished? If the director pays the penalty amount, enters into a payment arrangement with the ATO, places the company into liquidation, or places the company into administration within 21 days after the date of the notice, the penalty is remitted. By taking one of these actions the director will not be personally liable for the non-lockdown amount but will remain liable for a lockdown component. However, if the appropriate action is not taken within 21 days the entire penalty will lockdown and cannot be remitted. The relevant date is the date of the notice – not the day it is received.
A further take home here is – if your client receives a DPN they need advice. While the intention may be to enter a payment plan with the ATO, once the notice expires any penalty cannot be remitted in the future.
In this case the director had until the 16th of July, being 21 days after the date of the DPN. The non-lockdown component was $64,000 with the remaining $16,000 unable to be remitted (lockdown). In the case of this client, after reviewing the situation, and given the inability to continue to trade the business, we recommended that the company be liquidated and that we manage a controlled exit of the business. The director would then be able to seek paid employment. By acting swiftly, this would reduce the personal liability under the DPN to $16,000. Time was tight though. We had only met the client on the 3rd of July and the notice expired on the 16th of July. The client engaged our firm on Thursday the 4th of July.
Our team implemented the business exit strategy quickly and effectively. The company entered liquidation on Friday the 12th of July. Before we met the client, he believed that he was personally liable for $250,000. After meeting with us to seek assistance and engaging us to implement a strategy he learnt that his personal liability could be managed to $16,000. What an enormous relief for the director and his family!
Getting advice early is ideal, especially when faced with a significant event like the loss of income or the receipt of a claim or DPN, but even when it is left to the last minute, getting the right advice and acting promptly will provide a far superior outcome.