Updated: May 12
This month we take a look into the recent extraordinary step the ATO has taken in sending an estimated 30,000 to 50,000 warning letters to company directors. There were two types of warnings, that a director may receive a Director’s Penalty Notice (DPN) and that the ATO may report company taxation debts to credit reporting bureaux. We are not aware of the ATO issuing a large scale warning like this before.
Where is the DPN sent?
Let’s look at the issue of DPN warnings. The first thing to consider is that the warning letter, and any subsequent DPN, will be sent to the director’s residential address as per ASIC records. While registered office details are usually up to date, it is not uncommon for the director to forget to update their residential address on ASIC’s records. It is important to note that if the ATO sends the DPN to the address recorded on ASIC, the DPN is deemed to have been received whether the director actually sees it or not.
What are you liable for?
The potential big issue is around the amounts that a director could now be liable for under a DPN. From 1 April 2020 the DPN regime was expanded to include GST, WET and LCT. Of course, the big one is GST. While the ATO has had the ability to issue DPNs that include GST, as well as PAYG and superannuation, since the regime was expanded they have done so very rarely. Very few DPNs were issued at all during the pandemic. When the ATO does start issuing DPNs they will include a GST component, where applicable, and the amount of the penalty will likely be significantly higher than under the old regime.
DPNs for superannuation should not be news, but unfortunately the change that came into effect on 1 April 2019 continues to be overlooked. From this date, in order for a director achieve remission of any penalty under a potential DPN, superannuation must have been reported by the due date (i.e. within 28 days of the end of each quarter).
The ATO has warned that DPNs may be coming. This does not mean that we expect them to start filling letterboxes with penalty notices in the next few weeks. However, it is clear that the ATO is now refocusing its collection efforts.
So, I received a DPN – what now?
So, what happens if a company director does get a penalty notice? The answer depends on whether the debt the subject of the DPN has been reported within the prescribed timeframes, being within three months of the due date for PAYG, GST, LST and WET and by the due date for superannuation, or not. If not, the penalty is a “lockdown” penalty and the director can only avoid the personal liability by having the company pay the outstanding amounts in full.
If the ATO debts have been reported within the prescribed timeframes, the director has the opportunity to remit their penalty by paying the debt or by placing the company into voluntary administration, liquidation or appointing a Small Business Restructuring Practitioner (SBRP) within 21 days of the date of the notice. That is not the date the director receives it – it is the date on the notice. This does not leave the director much time to consider their options and take the necessary action. If a director has received a warning that they may receive a DPN they really need to plan now to deal with any penalty they might receive in the future.
Take home: Waiting until they get a DPN leaves very little time to deal with issues and is likely to lead to a worse result than if action is taken now.
What other tools does the ATO have?
Now let’s look at the ATO reporting a taxpayer to credit reporting agencies. This is a power the ATO has had for some time but has used very sparingly. You could argue that sending the director a DPN does not actually impact the operation of the company. It can still get credit, it can still trade as normal and incur more debt. In the past, the only way the ATO has been able to stop a company incurring more ATO debt has been to take action to have the company liquidated.
An adverse credit report could have an immediate impact on company trading. Trade credit could be difficult, if not impossible, to get. Trade creditors regularly monitor this type of information. The company’s bankers will not like it either. The threat of an adverse report is serious and could have a devastating impact on a company’s ability to trade. Only time will tell if the ATO follows through on this and starts making such reports.
Take home: Plan your next step according to your circumstances!
So, what should a company director do if they get one of these warning letters? Firstly, they should take it seriously. This is an indication that the ATO will pursue debt recovery. ATO debt will not just go away and will need to be dealt with at some point. Beyond that, the appropriate response will depend on the director’s and the company’s specific circumstances.
Right now we are talking to a client who operates a number of hairdressing salons. In this case the letter was about a DPN. The director has come to understand that the company simply cannot pay this debt. The director has had a tough time during the pandemic and the business suffered a huge impact from lockdowns. The director has lost her passion for the business and is now considering a controlled exit from the business. This will see the company put into liquidation and any potential penalty under a “non-lockdown” DPN remitted.
The director of a digital marketing company has been talking to us about a letter warning of a DPN. In this case, the director wants to pursue his interest in the industry and is now carefully considering whether a business restructure might be the right solution for him.
Another client has a construction company. While they are in a strong financial position right now, it is a tough industry and the director is concerned about personal liability for ATO debts. The director believes the company will be able to pay the ATO debt but is looking at a personal asset protection strategy just in case things don’t work out.
The important thing is to recognise that this problem is not going away and that a Plan B is needed now. Fair play to the ATO. Directors cannot say they have not been warned. What directors do now with the time they have been afforded will have a massive bearing on the outcome for them, their families and their businesses.
If your client has received one of these warning letters please feel free to contact us for an obligation and fee free discussion of what options may be available.
de Jonge Read Webinar 5 May 2022
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