The ATO debt collection holiday is over-be prepared!26 April 2022
The avalanche of corporate and personal insolvencies that many commentators expected to eventuate during and as a result of the COVID-19 pandemic has not (yet) materialised…. but that may be about to change.
Supporting businesses through the pandemic and affording them some breathing space to deal with creditors and unpaid debts, including taxation obligations has been a key aim of the federal government. A part of that strategy is reflected in the ATO’s generosity around its debt collection practices, which is in turn reflected in the number of ATO initiated corporate and personal bankruptcies —between 1 July 2020 and 31 March 2021, only six bankruptcies and three corporate wind-ups have resulted from ATO initiated legal action.
The consequence was an increase in annual Tax Debt from $26.5 billion for the financial year ending 30 June 2020 to approximately $38 billion for the year ended 30 June 2021. The total debt owed to the ATO as at 30 June 2021 is a staggering $55 billion.
That generosity is coming to an end. With the end of restrictions comes the beginning of a more aggressive collection approach from the ATO. There has, in recent months, been an increased use of garnishee notice and Director’s Penalty Notices (DPN) issued by the ATO as a mechanism to recover outstanding debt. That is consistent with indications from the ATO late last year that it intended to restart, and gradually ramp up, its collection activities to address the backlog of tax debt accrued over the last two years.
Directors haven’t had to deal with DPNs for a couple of years and given the backlog of tax debt, there will be a ramp up in the issue of DPNs to directors in the coming months.
What are director’s penalty notices?
A DPN is a formal notice issued by the Deputy Commissioner of Taxation to the directors of a company that has not met its obligations to pay Pay as You Go (PAYG) withholding obligations, Goods and Service Tax (GST), Luxury Car Tax (LCT), Wine Equalisation Tax (WET) and/or Superannuation Guarantee Charge (SGC) notifying the directors that the specific tax obligation has not been met by the company and that they may become personally liable for those debts.
A DPN provides 21 days’ notice of the ATO’s intention to commence proceedings to recover the debts if the DPN is not complied with.
The expiry of a DPN without response, will result in immediate personal liability of a director for a company’s tax debts.
There are two types of DPN.
A non-lockdown DPN is issued in circumstances where the tax liabilities of a company are unpaid but have been reported to the ATO (where a company has lodged business activity statements (BAS) and instalment activity statements within three months of the due date and/or has lodged SGC statements within one month and 28 days after the end of the quarter that the contribution relates to).
Under a non-lockdown DPN, directors can avoid personal liability if, within 21 days of the date of issue of the DPN, the company:
- pays the debt
- goes into administration
- appoints a small business restructuring practitioner, or
- goes into liquidation.
Notably, pre pandemic one of the options available to a director to avoid personal liability was to enter into a payment arrangement with the ATO under s 255-15 in Schedule 1 to the Taxation Administration Act 1953 (Cth). This arrangement is no longer an option.
A Lockdown DPN may be issued where a company has not lodged its BAS or SGC statements in time and has not paid the amounts due. The director becomes immediately personally liable for the penalty as soon as the Lockdown DPN is served on the director. The only way for a director to comply with a Lockdown DPN is to cause the company to pay the underlying debt or to pay the director penalty.
If you have recently been appointed as a director of a company, you can be held personally liable for historical SGC, PAYG and GST liabilities if those liabilities remain unpaid and unreported within 3 months or more after the date of your appointment.
New directors should take all necessary steps to ensure, upon their appointment, that the company’s SGC, PAYG and GST obligations are in order.
How should you respond to a DPN?
If you receive a (non-lockdown) DPN, you have 3 options (which must be taken within 21 days of the DPN being issued):
- pay the debt
- place the company into liquidation or voluntary administration or appoint a small business restructuring practitioner, or
- ignore the DPN, await proceedings and file a defence if you do not believe you should be responsible for the debt of the company.
As to the third of those options, available defences are limited and include:
- Where it would have been unreasonable to expect the directors to take part in the management of the company because of illness or other good reason.
- Where the directors took all reasonable steps to ensure that they caused the company to comply with its taxation obligations or appoint an administrator, liquidator or small business restructuring practitioner.
- Where the company took reasonable care and applying law in respect of any outstanding superannuation guarantee charge (relevant only to SGC).
What happens if I ignore a DPN?
In short, you will become personally liable for the company’s outstanding tax debt. It is then open to the ATO to commence proceedings against you for recovery of that date from you.
Additionally, the ATO is entitled to seek a garnishee order against any third party that owes you money or holds money on your behalf including your personal bank accounts and also to offset any of your tax credits against director’s penalties.
What to do if you receive a DPN?
If you receive a DPN you have to act quickly. You only have 21 days to comply before the company’s taxation liability becomes a personal liability.
You should seek advice immediately upon receipt of a DPN and certainly within sufficient time to ensure that you can respond to the DPN within 21 days of the date of its issue.