Welcome to the post-pandemic tax hangover: ATO warns small businesses about overdue debt

The Australian Taxation Office (ATO) has recently issued a flurry of warning letters to company directors of businesses with an overdue tax debt, particularly targeting those who have not been engaging or lodging with the ATO. Unless directors can actively manage their company’s tax affairs, they will be served with a Director Penalty Notice (DPN)—that could result in a director (or directors) being personally liable for their company’s tax debt.

Here’s what you need to know about these warnings and DPNs.

About Director Penalty Notices

During the pandemic, many businesses were able to maintain an appearance of solvency, though in fact they had no assets and were being kept afloat by Covid-19 business relief measures.

Now, as the economy grows stronger after almost three years of disruption and restrictions, the ATO is keen to recoup tax revenue from businesses and will use the recently extended Director Penalty Notice (DPN) program to do so.

However, the ATO’s foremost focus is on making directors aware of their obligations and personal liabilities, presenting a clear path for directors to follow to avoid escalation and penalties.

Which debts are captured under the DPN Program?

If you are a company director, for tax periods from 1 April 2020 onwards, you will be personally liable for your company’s debt liabilities relating to:

• Pay as you go (PAYG) withholding and superannuation.
• Goods and services tax (GST).
• Wine equalisation tax (WET).
• Luxury car tax (LCT).

What happens if I receive a Director Penalty Notice?

The ATO issues two types of DPN:

1. Non-lockdown DPN—issued when statements are lodged (within three months of the due date) but the debts are unpaid.
2. Lockdown DPN—issued where statements have not been lodged (within three months of the due date) and the debts are unpaid.

Non-lockdown DPN options

If you are served with this type of DPN, then you (and any other directors) must consider the following actions to avoid personal liability for the amount nominated on the notice:

• To place the company into liquidation.
• To place the company into administration.
• To appoint a small business restructuring practitioner and commence the small business restructuring process.
• For the company to pay its debt obligations to the ATO in full.

Lockdown DPN options

If you receive this type of DPN, there is only one option: to pay the debt to the ATO in full.

How long do directors have to act?

Directors have 21 days from the date of notice to act accordingly, not from when they receive them. This means it is critical that you make sure the address registered on the ASIC’s company record is up to date.

Key takeaways for directors

• Always lodge your statutory returns (BAS, Income Tax, FBT etc) even if your business cannot make a payment.
• Bring lodgments up to date to avoid further penalties, as general interest charges may continue to apply to the debt.
• Even if you have entered a payment arrangement with the ATO, this doesn’t mean that the tax debt is no longer due or payable, your obligations remain the same.
• The ATO can choose to report business tax debt information to registered credit reporting bureaus, which could adversely affect your credit score.

How Falanga & Co can help

We are here to provide you with a clear oversight of your business, including your tax obligation status and to help you resolve any concerns. Please get in touch today if you have received a letter from the ATO about an overdue tax debt, or been issued with a DPN, or if you would like to discuss your tax obligation status.