Tax Debt Implications on Businesses

What are the consequences for a business if they have tax debt?

In 2020-21 the Australian Tax Office’s (ATO) net tax collections were $451.4 billion, up by 11.5% from the previous year. Notably, $11.5 billion of this revenue was raised from compliance activities (includes debt recovery actions).

During the pandemic, the ATO had expressed their leniency toward unpaid taxes and lodgement deadlines for businesses. In recent times, this sentiment has changed. The ATO has resumed debt recovery actions for tax debt and have stated that businesses will face harsher penalties if left ignored.

What are the ATO’s debt recovery methods?

The ATO can pursue unpaid tax debt through several means, including Garnishee Notices, offsetting any tax credits against the existing penalties and/or further legal proceedings. These legal proceedings can often lead to a company being liquidated.

Director Penalty Notices (DPN)

A Director Penalty Notice is issued to company director/s outlining unpaid taxation amounts, penalties and consequences. If a company fails to meet a PAYG withholding, net GST or SGC liability in full by the due date, a company director becomes personally liable for those penalties equal to the unpaid amounts. The company director will remain liable for that debt even if they have resigned as a director.

Statutory Demand

A Statutory Demand is a legal notice issued to a company demanding payments for unpaid tax debts. It requires the company to either pay the tax debt in full or enter a payment plan with the ATO within a 21 day period. If a company ignores the Statutory Demand, the ATO can make the reasonable assumption (based on non-payment) that the company is insolvent and apply to the Federal Court to liquidate the company.

Garnishee Notices

A garnishee notice can be provided to a person or business that currently holds or will hold money for them. A Garnishee Notice legally requires that third party to pay the ATO directly instead of paying any money the company. An example of this in a company’s situation is if the ATO issues a garnishee notice to a company’s financial institution. That financial institution must legally pay the ATO for the stated nominated amount (by the ATO) to reduce the tax debt.

Key Takeaways

These ATO debt recovery actions can lead to serious consequences if left ignored. Unfortunately, we see many company directors that do not attend to the letters of demand by the ATO, so the matter gets significantly worse. When this escalates, it is often too late and the company goes into liquidation.

In order to avoid this, the company director must communicate with the ATO in order to make a payment plan. However, harsh debt recovery actions by the ATO will be avoided if taxes are kept up to date in the first place. Often, tax debts are a warning sign of insolvency.

We are committed to exploring all options with businesses and individuals that are facing financial stress in our initial free consultation. If you have a client that may be facing financial difficulties, contact us on 1800 463 328.

Article written 23 March, 2022