In April 2022 the ATO sent around 50,000 warning letters to company directors about their potential personal liability under a Director’s Penalty Notice (DPN). The ATO describe these as awareness letters that were intended to encourage taxpayers to engage with the ATO about their outstanding tax liabilities.
So, now over 2 months later, what is the current state of play? Recently, our Executive Director, Ashley Shield, participated in a webinar with Anita Challen, an Assistant Commissioner at the ATO who shared her insights into the current situation.
So, how much is the ATO owed?
The ATO has a number of measures for outstanding tax liabilities, one being the amount of debt the ATO considers recoverable. This number is now believed to be around $36bn. Small business represents a significant portion of the Australian economy, and likewise, a significant amount of outstanding tax debt that is considered collectable. Small business accounts for 50% of total employment within the economy and 30% of all GST revenues. However, in terms of collectable tax debt, small business is estimated to account for almost 70% of the amount outstanding – some $24bn.
The ATO's stated goal in issuing awareness letters was to have taxpayers engage with them about outstanding obligations. Ms Challen advised that some 30% of the companies whose directors received these letters have now either repaid their debts or entered into payment plans with the ATO. This is a significant number and a great outcome for the ATO. However, the ATO believes taxpayers have had sufficient time to engage with them about their tax debts, and 70% of taxpayers who received the letters have no approved payment arrangement in place.
How to achieve remission of a DPN?
We certainly encourage companies to pay their tax obligations. However, from a director’s perspective, it is important to note that entering into a payment plan alone will not remit the director’s personal liability under any DPN that is issued. The DPN will be sent to the director’s residential address as noted on the company's ASIC records. The only way to achieve remission of the penalty is, within 21 days of the date of the notice, to:
Appoint a Voluntary Administrator;
Appoint a liquidator; or
Appoint a Small Business restructuring Practitioner and propose a debt restructure.
Of course, 21 days from the date of the notice really means that the director has less than 21 days to decide what they are going to do. With mail delays and letters sometimes lying around unopened, the timeframe to deal with a DPN can be very limited. We recently had a case where one of our clients only realised what they had received 4 days prior to the 21 days expiring.
The clear take-homes are:
To check that the correct residential address is noted on ASIC records.
That all company directors must open their mail as soon as it is received, even if it might be bad news.
Even if the ATO agrees to a payment plan, after 21 days of the date of the notice the penalty will lockdown and the director cannot achieve remission. This means the only way the director can avoid personal liability is for the company to pay the tax debt to which the penalty attaches in full. Should the company be unable to maintain the payments the director will remain liable for any unpaid tax debt to which the DPN attaches.
Be prepared for payment plan changes!
Further, it is common for the ATO to agree to payments for a period of time and then review and re-negotiate the payment plan. The ATO needs to be satisfied that the business can afford the payments and that the plan is sustainable. Unless the business can demonstrate this, the ATO may not be in a position to accept a payment plan proposed.
This exact situation occurred recently with one of our current clients. The ATO agreed to a 12-month payment plan term with payments to be reviewed after 6 months. Our client was able to maintain the payment plan, but it was a strain on cashflow and depleted what remaining reserves the business had. Now, with the plan up for review, the ATO has rejected the proposed payment plan and advised the director they would be liable for $1.2m under a DPN. While the client has not yet received a DPN, their options in dealing with this issue are now more limited as all surplus resources went into maintaining the plan.
DPNs are now being issued...
We had expected the ATO to commence issuing DPNs, and Ms Challen advised that they are currently issuing around 100 per day. Yes – per day. It is also possible that this number will escalate if taxpayers continue to refuse to engage with the ATO. Noting the above, directors will need to carefully consider whether entering into a payment plan after the receipt of the DPN is the right course of action. If the business can clearly afford to maintain the payment plan and pay all tax debts in full this will not be a problem. However, if there are doubts about this there may be other options that are available to the directors to bring finality to their potential personal liability.
We wish to stress that the ATO has been very supportive and understanding of Australian business. The current collection actions of the ATO were always going to happen. The ATO is there to collect tax debts for the good of everyone, and this is part of their role. The ATO even went to the extraordinary step of issuing awareness/warning letters, so company directors cannot say they were not warned or given an opportunity to address their situation.
The reality is though, that many directors have already received, or will soon receive a DPN. In the majority of cases they may only have 10 to 14 days to achieve remission of the penalty, and entering into a payment plan will not do this unless the debt is paid in full.
Have a plan B!
Any director that has received an awareness letter and does not have an approved payment plan in place with the ATO needs a plan urgently. They need advice now so they can understand their options. Now - not after they receive a DPN.
While it is never too late to receive professional advice, the sooner a director has a Plan B in place the better. If you have a client in this situation, or are concerned about a payment plan, a few minutes on the phone with one of our Strategists for an obligation free chat about the options available could be invaluable.
Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies.
Contact us now on p. 1300 765 080 | info@djra.com.au