The Australian Taxation Office (ATO) has begun advising taxpayers of their outstanding tax debts as part of the resumption of debt collection actions.
In this first article of a two-part series on ATO debt collection, we address the current communications the ATO is issuing to taxpayers and potential issues every company director should be aware of regarding tax liabilities and insolvency.
ATO's debt awareness campaign
Last month, the ATO announced that they have resumed the collection of tax debts after a moratorium imposed as a result of COVID-19 and is looking to engage with taxpayers rather than undertake enforcement action as their preferred approach.
In order to spur taxpayers to engage, the ATO has issued 'awareness letters' to businesses under two programs – disclosure of business tax debts and Director Penalty Notices (DPNs). As of mid-May, the ATO had reportedly issued:
- 29,552 awareness letters for disclosure of business debts
- 52,319 awareness letters about DPNs.
These letters provide taxpayers with details of their outstanding tax debts and what the taxpayer's obligations are. The letters also aim to encourage taxpayers to take steps to manage the outstanding tax debt, either through paying the debt (in full) or entering into a payment arrangement.
Depending on the type of letter received, taxpayers who do not respond may see the ATO issue either:
- an intent to disclose business debt notices; or
- a DPN where there is outstanding GST, superannuation guarantee charges or PAYG.
Disclosure of business debts
This program allows the ATO, where certain criteria are met, to report significant tax debts (greater than or equal to $100,000) to credit reporting bureaus.
A business' tax debt may be reported if it meets the following criteria:
- it has an ABN (and isn't a deductible gift recipient, complying superannuation fund, registered charity or government entity)
- it has one or more tax debts totalling $100,000 or over that are overdue by more than 90 days
- it isn't engaging with the ATO to manage the tax debt (e.g. on a payment plan and complying with terms of the plan, applying for a release of the debt or actively disputing a decision or assessment that relates to the debt)
- the business doesn't have an active complaint with the Inspector-general of Taxation Ombudsman about the intent to disclose the tax debt information.
When a taxpayer receives an intent to disclose business debt notice, they will have 28 days from receiving the notice to take action to avoid the disclosure of the business debts.
Director Penalty Notices
Where the taxpayer is a company and the unpaid tax debt relates to PAYG withholding, Superannuation Guarantee Charge or GST, the ATO may pursue directors of the company for the tax debt personally.
After a DPN has been issued, the director has 21 days from the date of the DPN to resolve the tax debt or inform the ATO of a defence against the operation of the DPN.
The options available for dealing with a DPN include:
- paying the tax debt in full
- appointing an administrator
- appointing a small business restructuring practitioner
- winding up the company.
However, if a DPN has been issued to a director in circumstances where the company has not lodged an activity statement or superannuation guarantee charge statement, or it was lodged more than three months after it was due, the only way for the director to avoid liability is to pay the tax debt in full.
DPNs previously included an option to enter into a payment arrangement for the outstanding debt. This option appears to have been removed following the decision in Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy1, which found that entering into a payment arrangement did not cause a tax debt that was due and payable to cease being due and payable. As such, having a payment arrangement in place does not necessarily prevent a business from trading while insolvent.
While entering into a payment arrangement is no longer listed as an option on a DPN, a director should still consider this arrangement. Section 269-15(3) of Schedule 1 of the Taxation Administration Act 1953 (Cth) (TAA) provides that the Commissioner of Taxation must not commence or take a procedural step as a party to proceedings to enforce an obligation or recover a penalty if an arrangement that covers the company's obligation is in force.
If the Director does not comply with the DPN or a defence doesn't apply, the ATO may collect tax debt from either the company or its directors personally through:
- garnishees of bank accounts
- retention of tax credits
- commencing legal proceedings.
Any director who receives a DPN should take immediate action to either comply with the requirements of the DPN or seek advice as to what other options may be available to avoid personal liability. In the second article of this series, we will explore in-depth the options for dealing with a DPN.
Debts on hold
The ATO has also been issuing letters to taxpayers with aged debts that are on hold. Aged debts are amounts placed on hold due to the ATO considering them uneconomical to pursue. While these debts may not be shown as being outstanding, they have not been waived and may be reactivated if tax refunds or credits become payable to the taxpayer with the on-hold debt.
The ATO has stated that from this month (June 2022), they will be recommencing the practice of retaining refunds or credits payable to taxpayers to offset any debts on hold.
Offences for failure to pay tax
The ATO acknowledges that it expects a number of insolvencies to occur as the economy normalises. Company directors should be aware of how insolvencies and tax liabilities can affect a director.
If a company or trustee is unable to pay a tax liability when it becomes due and payable, other than being an insolvency issue, the company's directors or trustee may potentially be found to have committed an offence.
Once a company faces a tax liability, there are constraints on what transactions or arrangements might be negotiated or put in place. Legislation in place since 1980 (and initially applying only to sales taxes) has been progressively expanded, imposing severe penalties for company directors, lawyers, and accounting advisors.
The Crimes (Taxation Offences) Act 1980 (Taxation Offences Act) has not been widely deployed by the ATO. Section 5 of the Taxation Offences Act makes it an offence for a person to enter into a transaction or arrangement with the intention of securing that a company or trustee will be unable or likely to be unable to pay income tax payable by the company or trustee.
There are similar offences for those who directly or indirectly aid, abet, counsel or procure another person to enter into a transaction or arrangement that leaves a company or trust unable to pay an income tax liability.
In addition, sections 17 and 18 of the Taxation Offences Act also state that offences may also arise regarding unpaid superannuation guarantee charges and GST.
With what appears to be a large number of tax debts currently sitting in many companies, there might be some attraction to move assets away from those companies. However, that might not be wise. These offence provisions have a very broad scope and there is little guidance available as to what kinds of transactions or arrangements will attract their application.
The stated penalty for an offence under the Taxation Offences Act is imprisonment for 10 years or 1,000 penalty units or both.
While the offences require that a transaction or arrangement be entered into with an intention that a company or trust would be unable to pay its tax liability, directors need to be mindful of the additional risk that unpaid tax liabilities pose if there is the potential that the company becomes insolvent.
1Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy  FCAFC 5.
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