Our Comprehensive Guide to ATO Tax Debts

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The Australian Tax Office (ATO) is a company’s most powerful creditor. While tax debts are technically ‘unsecured,’ the legislative power of the ATO means it has the ability to recover outstanding debts ahead of other creditors.

Company tax debts can be very large in scale. This makes them difficult to repay on time, especially if a business is experiencing financial distress.

Directors also have a legal responsibility to ensure company taxes and employee entitlements are paid. If you fail to meet your obligations, you can be made personally liable for company tax debts.

While that’s the worst-case scenario, managing corporate tax liability is challenging.

In this article, we’ll provide a comprehensive guide to ATO tax debts, and how you should respond to official action by the Australian Taxation Office.

How Does the ATO Recover Company Tax Debts?

Australian companies are required to pay a variety of taxes to the ATO. These include income tax, Pay As You Go (PAYG) instalments, GST, and employee superannuation.

The ATO has three formal processes it can use to recover an outstanding tax debt from a company:

1. Garnishee Notice

What is an ATO Garnishee Notice?

An ATO Garnishee Notice allows the ATO to recover a tax debt by directly collecting the money from your company’s debtors. This typically involves taking money from:

  • Banks and other financial institutions
  • Company lines of credit
  • Trade debtors (e.g. your clients)
  • Any person or business who holds money for the company (or will hold money in the future)

In effect, an ATO Garnishee Notice allows the ATO to achieve priority over other company creditors. They can use this power to recover the tax debt without needing to deal with your company directly.

The ATO can also issue a personal Garnishee Notice to directors who have been made personally liable for company tax debts.

How to Respond When You Receive a Garnishee Notice

An ATO Garnishee Notice can seriously impact your company’s cash flow. If you receive a notice, it’s important to seek professional advice immediately. Your adviser will determine whether the notice is valid and if there are any grounds for revoking the order.

If the order is valid, the company needs to consider whether it’s capable of continuing to trade while its income is garnished. The company may proceed to liquidation if it’s at risk of trading while insolvent.’

2. Director Penalty Notice (DPN)

What is a Director Penalty Notice?

A Director Penalty Notice (DPN) is a notice issued directly to a company’s director, making them personally liable for unpaid:

  • Pay As You Go Withholding (PAYGW)
  • Goods and Services Tax (GST)
  • Superannuation Guarantee Charges (SGC)

Receiving a DPN is a serious matter. These debts can be large in scale, and directors may need to declare bankruptcy to meet their obligations.

Take action before receiving a DPN. Stay aware of your company’s unpaid and unpayable tax liabilities, and speak to a professional adviser as soon as possible.

Non-Lockdown vs Lockdown DPNs

The ATO issues two types of Director Penalty Notices:

  • Non-lockdown DPNs (also called “standard” DPNs) are issued where the company has lodged its Business Activity Statements (BAS), Instalment Activity Statements (IAS), and/or SGC statements within 3 months of their due date.

A non-lockdown DPN gives the director 21 days to avoid personal liability by doing one of the following:

  • Pay the debt in full
  • Appoint a Voluntary Administrator
  • Appoint a Small Business Restructuring (SBR) Practitioner
  • Appoint a Liquidator

Note that you are unable to avoid the personal liability by entering a payment agreement with the ATO after you have received a DPN. Even if you negotiate a payment plan, you still become personally liable for the full debt at the end of the 21-day period.

  • Lockdown DPNs can be issued where the company has not lodged its Business Activity Statements (BAS), Instalment Activity Statements (IAS), and/or SGC statements within 3 months of their due date.

In this case, the director has no option except to repay the tax debt in full. 

How to Avoid Personal Liability for Company Tax Debts

The best way to avoid personal liability for company tax debts is to meet your duties as a director. That includes:

  • Meeting the general requirements – Company directors are required to act in “good faith” and make decisions that are in the best interests of the company. As long as you are acting in good faith, it’s unlikely that you will be held personally liable for company tax debts.
  • Preventing insolvent trading – Directors must not trade a company while it’s insolvent. This also means it’s the responsibility of directors to stay abreast of the company’s financial position. Seek professional advice immediately if you’re concerned that your company is insolvent.
  • Keeping adequate books and records – Your company is required to keep records that explain its financial performance. Directors are ultimately responsible for ensuring these records are kept, and that they capture all the relevant information. Company records can be used to demonstrate solvency, or prove that the directors did not trade while insolvent.

3. Departure Prohibition Order (DPO)

What is an ATO Departure Prohibition Order?

A Departure Prohibition Order (DPO) is an order that prevents a company director from leaving Australia until their tax debt is paid. This type of order is issued where a director has been made personally liable for company tax debts.

You may receive a DPO if the Commissioner believes there is a genuine risk that you will leave the country without paying your debt. For example, a DPO may be issued if:

  • You hold foreign passports or citizenship
  • You are travelling without apparent reason
  • You are suspected of intentionally avoiding your liability

DPOs are issued by the Commissioner of Taxation. They can be issued to Australian citizens and visitors to Australia.

If you are subject to a DPO and need to leave Australia for legitimate reasons, you can apply to the Commissioner for a Departure Authorisation Certificate (DAC). These are issued at the Commissioner’s discretion.

Revoking a DPO

A DPO will be revoked in the following circumstances:

  1. The debt has been discharged.
  2. Satisfactory repayment arrangements have been made to pay the debt.
  3. The Commissioner determines that the debts will be completely irrecoverable.

The Commissioner is also empowered to revoke a DPO at their own discretion.

Penalties for Violating a DPO

Directors who violate a DPO can be:

  • Fined up to 60 penalty units (currently $186,780), and/or;
  • Imprisoned for 12 months.

It’s your responsibility to ensure you aren’t subject to a DPO if you are travelling internationally. You can still be found guilty of violating the DPO if you travel while “reckless as to whether” a DPO is in force.

What Legal Action Can the ATO Take?

If the ATO is unable to recover its money using the above methods, it can issue a statutory demand. A statutory demand gives the company 21 days to:

  • Pay its entire debt, or;
  • Enter into a payment arrangement with the ATO.

If you don’t comply with a statutory demand, the ATO can apply to the Federal Court to have the company wound up in liquidation.

A statutory demand is the ATO’s last resort. A company may receive a statutory demand if it:

  • Is unwilling to work with the ATO on repaying the debt
  • Is unable to pay its debts
  • Has a history of defaulting on payment plans
  • Appears to be intentionally avoiding its taxes
  • Appears to be engaging in phoenix activities (e.g. winding up a company to avoid paying its debts, and then continuing trading through a new legal entity)

The ATO is generally willing to negotiate a payment plan. However, it’s less understanding if your company has defaulted on a payment plan, or if you demonstrate unwillingness to corporate.

ATO Tax Debt Payment Arrangements

The ATO understands that company tax debts can be large in scale and difficult to repay. To give companies the best chance of meeting their obligations, the ATO is willing to work with directors and develop a suitable payment arrangement.

An ATO tax debt payment arrangement generally allows your company to pay off its debt in instalments. This can improve your short-term cash flow and prevent outcomes like liquidation.

ATO payment arrangements are negotiated on a case-by-case basis. The terms depend on the nature of the tax debt (e.g. income tax vs superannuation entitlements), your company’s taxation history, and its ability to repay the money. During negotiations, the ATO may agree to:

  • Reduce the total amount of debt, and/or;
  • Accept payments in instalments, rather than requiring a lump sum.

It’s crucial to work with a professional adviser when negotiating with the ATO. Reaching the right agreement can prevent liquidation, improving the outcome for the company, employees and creditors.

Get In Front of Company Tax Debts With Business Savers

The ATO takes corporate tax debts seriously. While they’re generally willing to negotiate a solution, large tax debts or director personal liability are a major concern.

The best way to manage company tax liability is to act early. Seek advice from the team at Business Savers before the ATO issues demands or takes legal action.

Business Savers is a team of Registered Liquidators. We have vast experience in dealing with personal and company tax debts, so we can provide support and help you reach the best solution possible.

We’ll work with you to assess your situation, respond to DPNs or Garnishee Notices, and negotiate with the ATO.

Contact us for a consultation about outstanding tax debts, or call us immediately if you have received a DPN or statutory demand.

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Posted on

July 1, 2024