ATO starts action on debts of 100k+.

In a previous blog post we alerted you to the fact that those businesses which struggled to make ends meet as a result of C-19, finding themselves unable to pay their tax bills, would be in the sights of the ATO shortly. 

We also let you know that legislation enacted in February 2020 (Coming Clean On Tax Debts)  allows the ATO to disclose to Credit Reporting Bureaus (CRBs) the details of taxpayers who have:  

  • ATO debts of greater than $100,000 which are over 90 days overdue; and 
  • who have failed to actively engage with the ATO regarding the repayment of this debt.

The trigger has now been pulled on CRB reporting and Director Penalty Notices.

On 13 May 2022 the ATO published a media release stating that:

  • “In regard to disclosure of business tax debts the ATO has issued nearly 300 intent to disclose notices and has commenced disclosing some of these to Credit Reporting Bureaus Equifax and Creditor Watch” 
  • “In regard to companies with outstanding obligations the ATO is currently issuing 30-40 Director Penalty Notices each day and expects that to increase.” and “The ATO has sent 29,552 awareness letters for disclosure of business tax debts and 52,319 awareness letters about the use of Director Penalty Notices”

Remember from 1 April 2020, the ATO’s DPN regime can make directors personally liable for debts, amongst others, arising from unpaid GST, PAYG and SGC obligations.
Further details on the DPN regime can be found here.

How can you help clients who find themselves in significant ATO debt?

Firstly don’t wait for the DPN to come, be proactive. Actively review your clients’ exposures to the ATO and alert them that action is required. For most SME businesses, they will be looking to their accountant for guidance. 

Secondly, nobody expects you to be an insolvency expert but you need to have a general understanding of the options available and this is where we can help. As recognised by CPA Australia (here), it confirms that you should avoid giving advice in unfamiliar areas.

So what are the options for clients who have a tax debt:

  1. They can do nothing – but each director will end up personally liable for the Company’s debt.  This option usually results in the ATO winding up the Company and taking action, even bankruptcy proceedings against each director personally to recover their debt
  2. Enter into a repayment program with the ATO, but remember for businesses with debts over $100,000:
    • the automated repayment option is not available and you will need to speak with an ATO officer;  
    • in the absence of a formal insolvency appointment the ATO is unable to compromise any primary tax debts due; flexibility only exists for penalties and interest;
    • a significant upfront contribution will be required;
    • evidence will be required to show the taxpayer has the ability to pay future taxes as and when they fall due and;
    • all tax lodgements will need to be up to date.  

If the debt is unable to be paid and as doing nothing is not really an option then the directors/shareholders should consider the appointment of:

  1. A Liquidator to the Company
  2. An Administrator to the Company
  3. A Small Business Practitioner to the Company

Small Business Restructure – is it finally their time?

Since its introduction in January 2020, the Small Business Restructure (SBR) regime continues to be under-utilised by Australian SME businesses that are in distress.  According to ASIC statistics, as of March 2022 only 42 Companies had applied to enter into the SBR process with 30 Plans agreed to by creditors.

We speculate that this low number is predominantly due to the lack of creditor pressure (particularly from the ATO during COVID).  However, with the ATO starting to refill its debt recovery pipeline many SME’s with COVID hangover debts should may want to consider utilising the SBR process to compromise debts owed to their creditors, including ATO debt.  In addition to compromising the debt owed, it can be used to prevent Insolvent Trading and fend off any potential ATO Director Penalty Notices.

Why chose to do a Small Business debt restructure:

  • Directors remain in control of the day-to-day operations
  • reduced complexity from other insolvency processes
  • reduced cost 
  • creditor action is halted
  • we help the directors prepare the offer to compromise unsecured debts

However a SBR will only suit certain clients.  For example to qualify for entry into a SBR the Company must:

  • Have creditors totalling less than $1million (excluding employee entitlements but including related parties and bank debt)
  • Neither the company nor its directors have previously availed themselves of the debt restructuring process
  • Have all of its employee entitlements paid (primarily being Superannuation); and
  • Lodged all of its returns with the ATO

Further reading on SBRs can be found here. 

For those that don’t’ qualify but are still insolvent, the traditional Voluntary Administration or the Liquidation pathways remain open.  Remember – for the director to have any chance to avoid personal liability for the unpaid taxes the Director Penalty Regime requires the appointment of and insolvency practitioner to be made within 21 days of the issuance of (not receipt of) the DPN. 

The ATO has publicly stated that it expects the number of insolvencies to increase over the coming months as the economy normalises.  Formal insolvency arrangements can be the circuit breaker needed for exhausted directors who need a break from dealing with hostile creditors and a poor performing business.  Mental Health issues also will play a big part in these situations and cannot be underestimated.  Resources to help directors who are finding their mental health is suffering can be found here.

As always, we are here to provide guidance and support to both you and your clients. Get in touch to discuss how we help to find the best solution.