ATO Debt – What if you don’t pay?
Approximately $20 billion of unpaid ATO debt remained outstanding in 2016.
Businesses or individuals with temporary cash issues can easily fall behind on their ATO payments. Although these taxpayers would prefer to stay on top of their tax obligations, they face significant hurdles when the ATO acts to recover the tax debt.
It is always best to manage tax debts (or any other kind) with a proactive approach. Obtaining professional assistance early to engage the ATO in negotiations for payment arrangements is likely to reduce negative consequences in the long run. However, as an accountant or business advisor, it’s essential to know what action the ATO could take if there is no payment arrangement in place or no payment plan can be agreed.
This article covers important information for business advisors and their clients:
- Single Touch Payroll and Superannuation
- How to negotiate payment arrangements for large tax debts or in complex situations
- What action the ATO can undertake to recover tax debts where no payment plan is agreed
- What impact ATO recovery actions can have
- How to avoid the negative effects of ATO recovery actions to recover tax debts
Single Touch Payroll and Superannuation
When looking at ATO debt, there have been recent developments. Single Touch Payroll (STP) is now mandatory – although many businesses are still struggling to adopt new software and systems. It is aimed at reducing regulatory burdens on businesses by attaching payroll functions to regular taxes and superannuation reports. The purposes of STP is to:
- Make sure superannuation funds report contributions monthly
- Allow the ATO to identify non-compliance and take prompter action more easily
- Improve the ATO’s recovery process
- strengthens director penalty notices (DPN)
- greater use of security bonds for the higher-risk employer
- improves superannuation collections by the ATO
- makes sure payments go into the employee accounts
- Lets the ATO seek court-ordered penalties, especially for employers who repeatedly get caught but still fail to pay SG liabilities.
- Give the ATO funding for an SG Taskforce
STP provides employees and the ATO with their payment summaries, including individual non-business, employment termination payments (ETP), and foreign employment income payment summaries. MyGov and STP compliant providers now provide validated data to employees.
Since the STP report is a year to date (YTD) balance, employers can make adjustments, even for previous pay periods. This YTD system gives employers the flexibility to correct mistakes as they are discovered.
In February 2020, Parliament passed legislation that enacted the Superannuation Amnesty to encourage employers to disclose past unpaid Superannuation Guarantee (SG) amounts. The amnesty covers shortfalls between 1 July 1992 and 24 May 2018. The Amnesty period ends six months after the legislation receives Royal Assent, so, at least into late August 2020.
- Creates tax deductions for SG Charge payments that are not otherwise tax-deductible
- Waives the $20 administrative penalty per employee
- Waives Part 7 penalties, typically 200% of the SG Charge owed
The hope is that up to 7,000 more employers disclose unpaid SG amounts with the legislation in place. Since SG non-compliance is now easier to detect, employers should consider coming forward by contacting the ATO.
ATO PAYMENT ARRANGEMENTS
The first step to manage tax debt is usually to agree on a payment arrangement or a payment plan. The ATO often approves a payment arrangement for smaller debts if contacted by telephone. For larger debts, written applications may be required and should include:
- A proposal for payments that deals with interest and penalties
- The reasons for falling behind on taxes
- Current financial information that establishes that the debt will be paid
- Profit and loss statement that shows profitability, cash-flow, budgets and forecasting
Payment arrangements often include:
- Tax debts being paid in instalments
- Future tax lodgements and payments being made on time
- Interest and/or penalties being waived
- Outstanding amounts to be paid within 12 months (although they may agree a more extended timeframe)
- Applying payments towards specific components of the tax debt (for example, this might be towards a DPN but the ATO ultimately chooses how they apply the payments).
For those owing large amounts of taxes, previously defaulting on a payment arrangement, or were refused payment arrangements there are additional points that may need to be provided:
- Give the ATO information about the circumstances that are relevant for considering another proposal for revising a payment arrangement.
- Advising the ATO about estimated returns if they force the individual into bankruptcy or the company to liquidation versus accepting the ATO payment plan.
- Comparison of the return to the ATO if a taxpayer’s proposal for a payment arrangement is accepted (on the basis that the ATO writes off some or all interest and penalties charged).
Security over assets
The ATO may request, as part of a payment arrangement, security over the taxpayer’s assets or assets from third parties to guarantee the debt. Most commonly, this security is a simple mortgage on real property. The costs of the preparation and lodging of standard ATO security documents add to the debt.
Where the ATO has refused a request for a payment arrangement, the taxpayer can proactively offer security over certain assets. This offer frequently leads the ATO to reconsider its position and, ultimately, into granting the payment arrangement.
Director Penalty Notices (DPN)
The ATO requires companies to:
- File BAS (business activity statements) quarterly (or monthly instalment statements) that report the PAYG due.
- Pay PAYG tax owed by the due dates.
- Pay GST owed by the due dates (personal liability for GST commences on 1 April 2020).
- Make superannuation contributions on behalf of employees by the due dates
- Before STP, file SGC (superannuation guarantee charge) statements if the company doesn’t pay contributions by the due date.
The ATO recovers unpaid PAYG taxes and superannuation payments from the directors through issuing a DPN.
The two kinds of Director Penalty Notices depend on the case:
- 21-day DPN – unpaid GST, superannuation or PAYG tax but did lodge the SGC and BAS statements within the three months of the due dates.
- Directors become liable for GST, PAYG tax plus superannuation in DPNs, unless:
- GST, PAYG tax and the superannuation is paid
- Company moves into voluntary administration or liquidation in the 21-day deadline
- Directors become liable for GST, PAYG tax plus superannuation in DPNs, unless:
- “Lockdown” DPN – fails to pay GST, PAYG tax or superannuation and fails to lodge its BAS and SGC statements within three months of due dates.
- Directors are automatically personally liable for unpaid PAYG tax and superannuation.
When directors are personally liable, the ATO issues a Director Penalty Notice to recover the GST, PAYG tax and superannuation from any directors personally. Importantly, the ATO:
- Holds the directors personally liable even when the company is liquidated or placed in voluntary administration.
- Issues DPNs after the company already is in voluntary administration or liquidation.
- Estimates the company totals for GST, PAYG tax and/or superannuation, then issues a DPN using those estimates.
When a director has liability under the DPN
Once a director is liable, the ATO treats the debt like any regular tax debt. The ATO will:
- Start legal proceedings for a court judgment for the total debt plus costs.
- Use that judgment for the issuance of a bankruptcy notice, then make the director bankrupt.
- Garnishee funds from the director’s bank accounts or their wages.
If there is more than one director, the ATO targets recovery action towards those with the best likelihood of recovery. The ATO uses the information on the directors’ past personal tax returns to decide.
Avoiding DPN liabilities
When a company faces financial difficulty, directors should seek professional advice early – however, this should be immediately when they receive a DPN. Professional advisors can outline the risks associated with continued trading, including the risks for the directors under the DPN.
- Directors should negotiate with the ATO to make payment arrangements. The ATO usually doesn’t issue DPNs if the agreement is in good faith. Plus, a DPN is not issued if payment arrangements are already agreed to and followed.
- All SGC and BAS statements must be lodged in time or, at the very least, within the three-month deadline. With the statements filed, but the payments not made, directors have 21 more days to put the company into liquidation and still avoid any personal liability. This timeframe is within 21 days of the issuing of the DPN – not from the receipt date (the 21 days starts ticking from the moment the ATO ‘licks the stamp’)
- Directors’ mailing addresses should remain up to date in the ASIC records since that’s where they send DPNs. Non-receipt because of changing your address is no defence!
- Potential new directors should check to make sure the company doesn’t have any outstanding superannuation, GST or PAYG tax before agreeing to become a director (you only have 30 days).
Mitigating actions when a director is liable under the DPN
When directors have liability under the DPN, and their company can’t pay the debts, the directors should:
- Seek advice immediately from qualified professionals (you may need a taxation lawyer)
- Negotiate for personal payment arrangements
- Share proportionate liability with other directors in the company
- Release equity from the family home or personal property
- Consider proposals for personal insolvency agreements (Bankruptcy Act 1966 (Cth)) for avoiding bankruptcy
- If nothing else, consider bankruptcy
How new and old directors differ
The ATO can issue DPNs to:
- Any director when the unpaid superannuation or GST/PAYG tax accrued but has since resigned
- New directors once they hold the position for 30 days or more
How to defend a claim under a DPN
A defence to claims under DPNs must establish that:
- Because of an illness or other reason, a director did not manage the company when the liability accrued
- The director took every reasonable step to meet the obligations to make all tax payments
- The director took reasonable steps to put the company into liquidation or to appoint a voluntary administrator
- they took all reasonable steps to ensure that the company complied with its obligations to pay superannuation.
Defending a DPN claim is difficult and legal advice can be expensive. This is why it is so important to seek advice early.
Garnishee notices, issued to someone holding money or who pays the taxpayer, gives the ATO a type of security against the property. It is a legal offence for recipients of garnishee notices to fail to follow the terms.
Mostly, garnishee notices go to:
- Banks holding the company’s or individual’s accounts
- Debtors owing money to the individual or company
- The employer of the individual to withhold from their wage
The garnishee notice recipient pays the funds directly to the ATO, instead of the company or individual making payments. The funds are tapped at source – for example, the ATO may issue a garnishee notice to a company’s
bank, requiring the bank to pay all or a percentage of funds held in the company’s bank accounts to the ATO up to the amount of the company’s taxation liability.
Garnishee notices have adverse effects on the company’s financial position. Available funds are now redirected to the ATO. Plus, garnishee notices for individuals result in funds directed from bank accounts. Or a percentage of wages sent to the ATO until they pay their debt in full. Companies and individuals falling behind in tax obligation payments should be proactive with the ATO. Not contacting the ATO makes them more likely to initiate recovery action, especially issuing garnishee notices.
Personal tax debts can be collected through a garnishee notice. Income taxes, PAYG or GST payable by sole traders, and any debts under DPNs. An employer garnishee notice requires a percentage deduction from before-tax wages to forward directly to the ATO.
If the individual then files bankruptcy, the ATO keeps enforcing the garnishee until the discharge from bankruptcy. This timeframe is currently at least three full years from when the statement of affairs was first lodged. The ATO keeps deducting funds from wages even when a person is bankrupt.
Minimising the impacts of garnishee notices
The first step is always to obtain appropriate professional advice to discover the risks in the specific case for a garnishee notice.
- Negotiate with the ATO for a personal payment arrangement
- Look at the information the ATO got during negotiations for the payment arrangements. For example, when the company’s debtors are listed, and if the ATO then refuses to set up payment arrangements, the ATO can garnishee those debtors on the list.
- The ATO issues garnishees notices to banks
- Appoint a turnaround practitioner to help with negotiations
Individuals with large ATO debts should:
- Start by negotiating payment arrangements
- Offer proposals for personal insolvency
- File bankruptcy when the debts can’t be paid
Once an individual is bankrupt, usually, the ATO doesn’t issue garnishees for pre-bankruptcy taxes.
If the ATO did issue a notice to an individual’s employer, they could:
- Resign and get another job. Garnishee notices do not move to the next employer automatically. However, the ATO could issue a further garnishee to the new employer after the bankruptcy.
- Submit to ask the ATO to reduce garnishee amounts for each payment. Taking various factors into account, the ATO will then decide whether or not to do this.
ATO COMPANY WINDING UP AND LIQUIDATION
When companies liquidate, they commonly owe a debt to the ATO. The ATO first issues a statutory demand. If a company fails to pay within 21 days, the ATO files the winding-up application in court. The court then places the company in liquidation unless they pay the debt in full. Alternatively, the option is open to negotiate suitable payment arrangements.
A company receiving the winding-up application can’t be put in liquidation voluntarily. However, directors can appoint a voluntary administrator. The administrator puts forward the proposal to compromise the debts to creditors (as DOCA), including the ATO amongst the body of creditors.
Proactive dealings and payment arrangement negotiations pay the tax debts before the winding-up application. However, even when the ATO issues the statutory demand or files the winding-up application options remain open for the company. It is not necessary to merely wait for the ATO to put the company into liquidation.
Companies facing liquidation successfully negotiate payment arrangements
Many companies succeed in negotiating new payment arrangements, even after an ATO statutory demand or winding-up application.
The negotiation of a payment arrangement is more difficult after a winding up application has been filed. Usually, the ATO requires significant immediate payment towards the debt upfront. Plus, a company director guarantee may include their personal assets as security.
ATO BANKRUPTCY PROCEEDINGS
The ATO commences legal actions against individuals who owe tax debts. These tax debts are the same if they are under a DPN. When legal proceedings receive no defence, or the case is not successful, the ATO obtains a judgment. That judgement includes the taxes owed, plus all interest and court costs.
When the ATO gets a court judgment for over $5,000, that judgment can be the basis to arrange the bankruptcy notice. A bankruptcy notice is served directly to the person, either in person or through a substitute service, according to the court order.
After the date of a bankruptcy service, the individual has only 21 days to pay. If they don’t pay, then the ATO applies to the court to force the person into bankruptcy. The court hearing date is about a month after the court receives the application.
Help to negotiate payment arrangements – individuals who face bankruptcy proceedings
It is always best for everyone to act early when dealing with the ATO. Negotiating early is important when making payment arrangements (before the ATO starts to take recovery action). The ATO remains open to negotiations even when they already issued the bankruptcy notice, and legal proceedings to force bankruptcy. Sometimes even a proposal to pay a debt in instalment payments over two years is acceptable. Usually, security over real property makes up a portion of the payment arrangements.
OTHER RECOVERY ACTION AND ATO RECOVERY TOOLS
- Disallowed PAYG withholding credits
Sometimes, the ATO “disallows” otherwise applicable PAYG credits on the director’s personal tax returns if the company didn’t pay the PAYG tax.
- Hiring third-party debt collection
The ATO regularly hires external debt collectors or lawyers for the collection of unpaid taxes.
- Security bonds
Sometimes, the ATO asks a company for security bond deposits against estimated future taxes. The ATO could ask for security bond deposits before the company is registered for an ABN. When the company’s directors were previously with companies with any history of failing to report or pay taxes, the ATP takes proactive action.
- Claims of unfair preference – indemnities from directors
A liquidator can recover amounts the company previously paid in taxes for six months before their relation-back day. This is called an unfair preference claim. The ATO then can seek payments from the director for the PAYG tax the ATO pays the liquidator.
- Credit reporting agencies
The ATO may disclose outstanding tax data to credit reporting agencies. The criteria are set out in the legislative instrument which was registered on 23 December 2019 with a commencement date of 21 February 2020. The ATO discloses outstanding tax information only for taxpayers who have an ABN if:
- The unpaid tax is over $100,000
- Taxes are more than 90 days overdue
- No payment arrangement is in place
- Taxes are not under dispute
The ATO will notify a business in writing if they meet the reporting criteria and give them 28 days to engage with the ATO and take action to avoid having its tax debt information reported. Businesses which are engaging with the ATO to manage their tax debts will not have their tax debt information reported.
ATO details for COVID-19 assistance to businesses
The Commissioner of Taxation Penalty pledges to help businesses cope during the economic crisis created by the coronavirus pandemic. Some administrative relief measures include the deferral of tax payments, remissions, and various PAYG instalments. The ATO announced a more flexible approach handling taxpayer accounts over the next few months. The list of measures includes:
- Deferrals of up to four months on the payment dates for amounts due on business activity statements like:
- Allowing for businesses who regularly report GST quarterly to opt for monthly GST reports, so they have immediate access to any GST refunds.
- Plus, businesses now are allowed to forego their pay-as-you-go (PAYG) instalment payment amounts for the April 2020 quarter, making no payment at all.
- Businesses that do eliminate their PAYG instalment payment can also claim a refund for previous instalments made in the quarters for September 2019 and December 2019.
- The ATO may also remit interest and penalties from on or after 23 January 2020 for tax liabilities. Affected businesses may be allowed to pay any existing plus ongoing tax liabilities through low-interest payment plans.
The ATO is willing to do what it can to help the community through this incredibly difficult time during 2020. They encourage businesses impacted by the coronavirus pandemic to contact the ATO to discuss options. The ATO is working closely with many organisations, assisting them with several options to weather this difficult time.
It is important to note that coronavirus assistance is unlike bushfire relief measures that were automatically applied to specific geographical areas. Coronavirus assistance measures are not automatically implemented as they are explicitly reserved for those businesses most impacted by COVID-19.
The ATO is looking to ease the access to relief options by establishing some temporary shopfronts in the areas of highest impact. The ATO is also considering other in-person options for other geographical regions that become significantly impacted.