In recent months, Marsh & Partners has identified a significant increase in ATO enforcement activity against late payers and non-payers. The ATO’s latest annual report shows the total amount of collectable debt at 30 June 2017 to be $20.9 billion, therefore recovering escalating business debt seems to have moved higher on their agenda.

The ATO recognises that businesses and individuals may experience cash flow issues from time-to-time and are generally amenable to payment plans for BAS or income tax debt. They will only resort to “stronger action” when taxpayers repeatedly default on agreed payment plans, deliberately avoid communication or payment, and are generally unwilling to resolve their debt issues.

What happens if you can’t pay your ATO debt on time?

If you can’t pay your debt on time, you will be charged a penalty for late payment as well as interest on the unpaid amount. Interest rates are updated and charged quarterly with the current rate for the January – March 2018 quarter set at 8.72%. Any future refunds which are due to you will be used to pay down the amount owed.

The ATO will contact you regarding the debt either by SMS, myGOV, letters or phone. If you use a tax agent, the ATO will contact them as well.

The best advice we can give you is to be pro-active in your management of the debt. Problems arise when taxpayers ignore the ATO’s attempts to rectify the issue.

ATO debt recovery actions

Generally, the first step the ATO will take is to call you, write to you or contact your tax agent. They may do this directly, or it may be through an external debt collection agency.

At this point, they will usually be open to negotiating a payment plan to give you some time to pay the debt. The ATO may consider a number of factors before accepting a payment plan:

The amount of the debt
Your ability to meet the payments
The amount of time you are seeking
Your assets and liabilities
Whether you have a history of entering into payment plans
Whether you have a history of defaulting on payment plans

If you (or your tax agent) are able to negotiate a payment plan with the ATO they will not take any further action to recover the debt, as long as you comply with the terms of the arrangement. This generally means that you must make all payments on time and keep up with your future lodgement and payment obligations. Even when you know you won’t be able to pay, you should still lodge future activity statements and tax returns on time. Not only will you avoid late lodgement penalties, but you will also demonstrate that you’re aware of and committed to your obligations.

If you don’t comply with the terms of the payment plan, or you have not taken steps to resolve the situation, then the matter will most likely be escalated through one of the following “stronger action” steps:

Garnishee Notice

The ATO is empowered under the Taxation Administration Act 1953 to recover outstanding tax debt from third parties by issuing a garnishee notice directly, without an order from a court.
A garnishee notice can be issued to anyone who holds money on your behalf. This most likely means your bank, but may also include your employer, trade debtors or purchasers of your assets.
The person or business holding your money does not need your permission to pay the funds to the ATO as they are legally bound to comply with the ATO’s notice.

Director Penalty Notice

As a Director, you can be held personally liable for company Pay as you go Withholding (PAYG), Superannuation Guarantee Charge (SGC) debts, and Goods and Services Tax (GST) and may be issued with a Director Penalty Notice (DPN).
DPNs are used to encourage the director to make the company comply with its tax obligations, or put the company into external administration if it can’t pay its debts.
You can read more about DPNs in this article

Claim or summons

The ATO may file a claim or summons with the relevant court of your state or territory. Once the court has recognised that the debt is owed, the ATO may execute on the judgement debt in a number of ways, including by filing and serving a bankruptcy notice.

Bankruptcy notice

If you receive a bankruptcy notice, you need to pay your debt or make a payment plan with within 21 days. If you’re unable to do this, the ATO may file a creditor’s petition to make you bankrupt.

Creditors petition

The ATO will make an application to the Federal Court or Federal Magistrates Court for a sequestration order to declare you bankrupt.

Statutory demand

The ATO can issue a statutory demand for payment to a company that has not paid its debts. A statutory demand requires the company to pay the entire debt, or enter into a payment plan, within 21 days.
If you do not comply with the statutory demand, the ATO may use the non-payment as evidence that your company is insolvent and may apply to the Federal Court to wind up the company.

Wind-up action

The ATO will take action to wind up a company if it has failed to pay its debts and has failed to make a suitable payment plan.

ATO soon to have power to disclose debts to Credit Reporting Bureaus

The ATO has announced that it is seeking the ability to report tax related business debts to Credit Reporting Bureaus (CRBs). This measure will apply to businesses with an ABN and a tax debt of more than $10,000 that is at least 90 days overdue. The ATO has indicated that it will only use this power if a business has not effectively engaged with them to manage their tax debt. “Effective engagement’ is still to be defined but we expect this will mean businesses that have committed to a payment plan, or those that are in dispute over their liability.

The ATO has also indicated that it will provide reasonable notice to the taxpayer of its intention to disclose information to a CRB.

The reporting measures are still in draft legislation and submissions to Treasury were due on Friday, 9 February 2018.

If the tax debt is listed on your credit report, it will have a significant impact on your business and could make it difficult to access funding from banks and other lenders. Other businesses might also refuse to extend credit and the ability to obtain trade accounts with suppliers could be impacted. Once the debt is on your credit file, paying the debt will not remove the default – it will still stay on your file for 5 years.

Further help:

If you have a tax debt that you are unable to pay in full, we recommend early engagement with the ATO to address payment options. If you have received a Director’s Penalty Notice or a Garnishee Notice, you should seek professional advice. As your tax agent, Marsh & Partners are able to assist with this and negotiate a solution on your behalf.

In addition, the ATO advises businesses with a tax debt take the following steps to address it:

Ensure all accounting entries are up to date;

Ensure all BAS and IAS are lodged by the due dates;

If a tax debt is in dispute, communicate with the ATO to resolve the dispute.

You can reach us on 07 3023 4800 or at mail@marshpartners.com.au.

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