The ATO’s stronger debt collection measures
The Australian Tax Office (ATO) has implemented stronger debt collection measures to counter the recent increase in tax debt of small business owners.
The Sydney Morning Herald recently reported an increase in Australian tax debt to almost $20 billion, with small business taxpayers accounting for 60 per cent of the money owed.
The Australian Taxation Office (ATO) says it will take “more timely action” to prevent small business debts escalating. This will include legal action where there is evidence the business is insolvent.
The ATO has confirmed that it “will use stronger measures when people:
- are unwilling to work with us
- repeatedly default on agreed plans
- don’t have the capacity to pay and don’t take steps to resolve their situation
- have been subject to an audit where deliberate avoidance was detected and payment avoidance is continuing
- appear to be engaging in phoenix activities (that is, using liquidation to avoid financial obligations without risking assets and with the intention of resuming business operations through a new entity).”
The 4 stronger debt collection measures to be used by the ATO:
1. Garnishee notices: The ATO has the power to issue a garnishee notice to a person or business that holds money for a small business owner. The garnishee notice will typically be issued to the business owner’s financial institution or its trade debtors, requiring those parties to make payments directly to the ATO.
We have recently witnessed how a garnishee notice can bring a business to its knees. Payments made to the ATO pursuant to a garnishee notice, which were not in the business owner’s budget, can leave them without sufficient remaining cash to pay essential operating overheads.
2. Director penalty notice (DPN): Where a director fails to make PAYG withholding or superannuation guarantee charge (SGC) payments on time or comply with associated reporting obligations, the director becomes personally liable for those debts. The ATO can then issue a DPN to the director that enables the ATO to start legal proceedings to recover the penalty. The penalty is remitted where the company pays the debt, the company enters into Voluntary Administration or Liquidation within 21 days of the DPN being issued and the PAYG and SGC liabilities are reported to the ATO within three months of their due date.
We have seen a number of instances recently where directors have not acted upon a DPN when received. This has left the director in a position where they are personally liable for the company tax debt, the ATO are applying pressure on them to collect the debt and the director is left with fewer options to deal with the debt through their business.
3. Statutory demand: The ATO can issue a statutory demand for payment to a company that has not paid its tax liabilities. The statutory demand requires the company to pay the debt within 21 days or enter into a satisfactory payment arrangement. Failure to comply with a statutory demand is an event of insolvency and provides grounds for the ATO to commence winding up proceedings against the company.
We have spoken to a number of business owners recently who have attempted to enter into an instalment repayment arrangement with the ATO following receipt of a statutory demand. The business owner was not in a position to agree to a short repayment term (less than 12 months), therefore the ATO required security to be provided in support of a longer repayment term.
4. Winding up proceedings: Where all other attempts to collect a company debt have failed and a statutory demand has not been satisfied, the ATO will take action to apply to Court to have the company wound up and a liquidator appointed.
When the ATO commences this process, they are very rigid in their approach. The prospect of entering into a repayment arrangement at this late stage can become problematic for the business owner.
Accountants and advisors to small business have the opportunity to provide an invaluable service to their clients by helping them manage their lodgements and tax liabilities so that they are not exposed to these strong ATO debt collection measures.
However, in the event that your client is facing financial difficulty together with a rising tax debt, we recommend seeking advice from an insolvency professional early to keep as many options open for them as possible.
Disclaimer: Please note that this article is a summary only and does not constitute legal advice. The facts of every situation differ and should be discussed with a qualified advisor if advice is required.