Watch out for the DPN equivalent for sole traders
We all hear about director penalty notices (DPNs) for company directors and its power over personal liability for certain tax debts. But what about the 31% of small businesses1 operating as sole traders? The ramifications that can flow from a sole trader with tax debt, can be just as alarming.
The Australian Taxation Office (ATO) has been engaging with small business advisors and their clients to get tax debt repaid in full or through payment plans with the condition to lodge all outstanding tax lodgments and, of course, to lodge all future lodgments on time.
When this approach is unsuccessful or the taxpayer is not engaging with the ATO to resolve paying the debt owed or lodging outstanding tax obligations, it's evident the ATO has deployed the stronger action tactics to collect the debt.
We've had several examples recently where sole traders have received court proceedings initiated by the ATO2 suing for the tax debt owed.
And this means that your clients may be more vulnerable than you think.
Any sole trader clients, with a tax debt, unable to get a satisfactory payment plan or have a poor tax compliance history (including outstanding tax lodgments), are at a high risk of being served with court proceedings to give the ATO a court judgment for the debt owed.
Sole traders have a significant exposure to being personally liable for all business debts. And not just business assets at risk, the risk extends to the business owner's personal assets including the interest held in jointly owned assets like a home/real property.
So, let's answer two crucial questions:
- How long will my sole trader client have to resolve this debt?
- What are the steps in the debt collection process for sole traders?
How long will my sole trader client have to resolve this debt?
The ATO's current debt recovery strategy includes commencing court proceedings as a starting point to recover tax debt owed by small businesses operating as sole traders.
If the court decides the debt is owed to the ATO, it will give an order for judgment debt in the absence of any defence that your client is able to attend court to assert such defence.
Securing an order for judgment debt is a precursor to the ATO serving your client with a bankruptcy notice. And if that occurs, your sole trader client has 21 days to pay the debt or, in some circumstances, make a payment plan.
What are the steps in the debt collection process for sole traders?
If your client receives a bankruptcy notice from the ATO and fails to pay the debt owed in the sum stated within 21 days, then the ATO is well positioned to proceed with court proceedings to have your sole trader client declared bankrupt.
Be warned this is the action the ATO may take if a small business sole trader is not engaging.
This has happened to three sole traders referred to Worrells in the last six months. Unfortunately, the accrued debt owed to the ATO was significant, more than the business and personal assets the business owner held, making it too late for any other option to resolve the unpaid debt, other than to go ahead with a bankruptcy appointment.
What to do if your sole trader client is served with court proceedings?
I strongly encourage advisors to talk to their sole trader clients described in the circumstances outlined above. They must contact the ATO to discuss their circumstances and be proactive about finding a solution and perhaps taking some simple steps (like lodging outstanding returns/obligations) that will assist the ATO in exercising more favourable terms before the matter is deferred to stronger action tactics. For the sake of your client's credit report alone (let alone their mental and physical health), they don't want court proceedings noted on their file. Or to have the ATO notify credit reporting bureaus of their business tax debt (read more on this here).
Concurrent to encouraging clients to change their mindset or heeding your warnings about the consequences outlined in this article, refer your clients to the local teams at Worrells. Tough situations need a balance of genuine care matched with an expert understanding of the options available. We'll listen to their story, then give the straight talk on the best plan of attack for their unique situation. Here's what you can expect from meeting with us as complimentary: click here
2 Through the Deputy Commissioner of Taxation as the plaintiff.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.