Dealing with big government debts isn't always easy – but it can be done. When debts arise with the Australian Taxation Office (ATO), there are three main courses of recovery action it can take against your company:
- Garnishee notices: Issued to your bank or a debtor requiring them to pay funds to the ATO that would otherwise go to your bank account or you directly.
- Director penalty notices: Notices making a company's directors personally liable for PAYG tax and superannuation guarantee charge debts.
- Statutory demand and winding up proceedings: A process to appoint a liquidator to a company.
When any of these processes occur, the natural next steps are to ask your accountant to request an ATO payment arrangement, or find money elsewhere to pay to them. While it is crucial for your company to take steps to regain control of your ATO debt, you also need to address the underlying causes of your business' financial difficulties.
This will help you to avoid failing your ATO payment arrangement and risking further enforcement action. Read on to find our tips for company directors that want to get out (and stay out) of these situations.
1) Enter into an ATO payment arrangement
In 2014, the ATO entered into 750,000 payment arrangements. The ATO is open to working with businesses to help them survive, continue employing staff and paying tax. After all, that's what keeps our economy ticking over.
Payment arrangements play a couple of key roles. Firstly, they keep the ATO from taking further recovery action and secondly, they allow you to regain control of your cashflow – and better manage your business.
Have you properly considered what you can afford to pay under a payment arrangement?
However, have you properly considered what you can afford to pay under a payment arrangement? And what you will do differently to ensure you can meet your payment arrangement terms?
Often, clients we see have failed to meet the payments required under their ATO arrangements. This can be the result of entering into a payment arrangement your business can't afford, or failing to improve business profitability and cashflow. Some clients have failed nine or 10 arrangements before seeking our assistance. At this stage, the company's debt has ballooned and the ATO becomes less willing to continue its support, often leading to more serious action.
We believe that to achieve the best result from an ATO payment arrangement, a strategy should be implemented to improve cashflow and profitability. This may be something agreed internally, in conjunction with your accountant or as part of comprehensive turnaround or restructuring procedure.
2) Lodge IAS, BAS and SGC returns within three months of their due dates
If a company owes the ATO unpaid amounts of PAYG tax (withheld from salary and wages) or compulsory superannuation contributions, the ATO can issue a director penalty notice (DPN) for these amounts. The DPN is a notice to each director advising them that they have, or will, become personally liable for their company's outstanding PAYG and superannuation debts.
Two types of notices can be issued by the ATO. One allows the directors 21 days to appoint a liquidator or administrator to the company to avoid personal liability, and the other advises the director they are personally liable unless the debt is paid in full by the company.
The type of notice issued depends on whether the ATO Business Activity Statement (BAS), Income Activity Statement (IAS) or superannuation guarantee charge return (SGC return) relating to the outstanding debt were lodged within three months of their due date.
If they were, the ATO can only issue the DPN giving 21 days to appoint a liquidator or administrator to the company to avoid personal liability. If the respective return was lodged more than three months past its due date, the debts become 'lockdown amounts' and the director cannot escape personal liability.
Directors should therefore ensure that all IAS, BAS and SGC returns are lodged within three months of their due dates to avoid becoming liable for any lockdown amounts.
For companies that the ATO classes as large withholders (more than $1 million in PAYG tax), there is no regular reporting function without payment. Accordingly, if your company cannot pay its PAYG debts, arrangements should report the company's PAYG liabilities to the ATO within three months of the due dates for payment.
3) Update the ASIC registered addresses for the company and the directors
If the ATO issues any enforcement notices, it is essential to ensure you receive them as soon as possible. The urgent 21-day time frames for DPNs and statutory demands require prompt action, as time lost may force a decision to be made that is not properly considered.
Statutory demands will be issued to the company's registered office, and DPNs will be issued to the directors at their personal addresses registered with ASIC.
4) Understand your company's exposure to a garnishee notice
Over 73,000 ATO garnishee notices were issued in 2014. These are most often issued to banks, and sometimes to traders or other debtors if the ATO has their details. The ATO will generally hold your banking details from ABN, GST or tax registrations making it easy to issue a notice to your company's bank.
If you use an overdraft facility, the ATO will not be entitled to withdraw funds from this account. However, the bank will be required to pay the ATO all balances you hold, and any subsequent deposits to those accounts up to the amount of the notice.
5) Keep in regular contact with your external accountant
Your company's accountant is your best friend when it comes to dealing with ATO difficulties.
Your company's accountant is your best friend when it comes to dealing with ATO difficulties. They know your financial circumstances, communicate regularly with the ATO and are experienced at helping clients understand and overcome challenges.
If your financial circumstances reach a point where you require professional legal or insolvency assistance, your accountant can put you in touch with their contact best suited to help you.
6) Seek specialist assistance
If your company has failed a number of ATO payment arrangements, it is a sign that your company has bigger issues and may be insolvent. The ATO's primary aims are to secure ongoing lodgment and payment of their debts. If your debts are increasing, the ATO will be reluctant to offer further payment arrangements without assurances about your intention and ability to meet your ongoing obligations.
We are experienced in dealing with the ATO where circumstances have become serious and a company's solvency is called into question. We can assist when you need to negotiate with the ATO, we can consider possible turnaround strategies or even discuss your pre-insolvency options.