The ATO has traditionally been less active in following up lodgements, in particular BAS, IAS and quarterly superannuation guarantee charge (SGC) returns.
So, business owners nearly always view outstanding ATO lodgements as the lesser of two evils, when compared to outstanding debts.
However, we’ve recently seen a number of clients lodge outstanding returns (from 2 to 8 years’ worth) without submitting a payment arrangement at the same time.
What follows can be disastrous: the ATO immediately issues garnishee notices, director penalty notices, and/or statutory demands. These steps can lead to sudden closure of a business.
In other words, the very steps you take to get the business back on track can actually derail it!
That is, unless you take the proper steps to follow through with the ATO, as explained below.
What can the ATO do if you have outstanding ATO lodgements?
If you have outstanding lodgements, the ATO may:
- Commence court proceedings to impose fines and obtain information;
- Conduct an audit of the payroll and other financial records; or
- Make an assessment on information available to them.
It is generally beneficial if you voluntarily provide outstanding lodgements and information to the ATO, rather than requiring them to enforce these obligations.
Considerations before lodging outstanding returns
Before you instruct your accountant to lodge a collection of outstanding returns, you need to consider:
- What action the ATO may take;
- What you can do to deal with the resulting debt if it can’t be paid in full; and
- Whether your company will be insolvent, leading to further concerns.
These are further discussed below.
What action may the ATO take once outstanding lodgements are submitted?
When outstanding ATO lodgements are submitted, general interest charges (GIC) and penalties will be applied to the debt, dramatically increasing the amount.
For instance, a $150,000 debt could become $200,000 with GIC applied. In the past, the ATO have been quite lenient on remitting GIC; however, this has not been the case in recent times. Accordingly, do not assume that the ATO will easily wipe your GIC bill.
Once the ATO has become aware of the debt owed to it (through one of the above avenues), it may issue one or more of the following without warning:
- Director penalty notices, making the directors personally liable for their company’s PAYG and superannuation debts;
- Garnishee notices, taking funds from known bank accounts or debtors; and/or
- A statutory demand in order to commence winding up proceedings to liquidate a company.
How to deal with the resulting debt – if it can’t be paid in full
If your company cannot pay its resulting ATO debt (including GIC) in full, a proposal for an ATO payment arrangement can be submitted to pay the debt over time.
Such proposals generally require an upfront lump sum, instalments to pay the balance within 12 months and future lodgement and payment obligations to be met on time.
If you’re submitting a number of outstanding lodgements, we recommend submitting a payment proposal to the ATO for consideration at the same time or immediately after. While a proposal for a payment arrangement is under consideration by the ATO, they should not undertake the further enforcement actions mentioned above.
If you do not have available funds to pay a significant lump sum:
- The company may need to obtain finance;
- Directors may contribute funds personally e.g. through refinancing their property (Note: any loans should be secured by a loan agreement and PPSR registration); or
- The ATO may seek to take a mortgage over the directors’ personal residence.
Further concerns if your company is insolvent
If your company is able to enter into a payment arrangement that it can continue to comply with, as well as paying its other debts, it may be returned to solvency and, hopefully, profitability.
If not, you will need to understand whether the company may be insolvent, in which case:
- You have various duties, not least of which is to prevent insolvent trading;
- You may need to consider further turnaround or restructuring measures to save the business; or
- You may need to appoint an administrator or liquidator
Additionally, payments that the company makes to the ATO within six months of it entering liquidation may be recovered by a liquidator as unfair preference payment. In such cases, if the ATO is required to repay money to a liquidator, it can then seek to recover that money from the company’s directors personally. So ironically, a director loaning their company money to pay the ATO, could end up having to pay the money to the ATO again in liquidation!
Make the right ATO lodgement decision: your business may depend on it
Company directors should have a good grasp of the above before submitting outstanding ATO lodgements.
Failure to properly consider the likely impact of their actions may lead to insolvency and closure of an otherwise viable business.
If your business is already struggling or insolvent, an ATO payment arrangement may form part of the bigger picture. So, it is worth seeking professional guidance from an accountant, turnaround practitioner or liquidator to understand your options.
If you have further questions, get in touch at 1300 4 222 887 or ask a question now in our livechat window.