Accountants: Do your clients have ATO debts of 100k+? Here’s what you need to know.

A scenario familiar to many accountants this year more than ever is a client who’s struggled to make business ends meet as a result of C-19, and has found themselves unable to pay their tax bills as a result. Huge debts have racked up and it begs the question: how do we help clients out of this situation?

Our first and most important piece of advice is the sooner you actively seek help for troubled clients, the better. For many, deferred debts carried into the current financial year will constrain their recovery – particularly with little help available from the government this time around. As you would be aware, the ATO has been focussing its attention on compliance as a result of thousands of business owners neglecting to lodge returns over the past 18 months.

We have previously alerted you to legislation enabled in February last year that allows the ATO to disclose to Credit Reporting Bureaus (CRBs) the details of taxpayers who have:

• ATO debts of greater than $100,000 which are over 90 days overdue; and
• who have failed to actively engage with the ATO regarding the repayment of this debt.

We can now share with you the ATO have recently issued notices of intent to businesses who met the above criteria. By releasing the information to the CRBs the ATO believes it will level the playing field and remove the unfair advantage businesses that are not paying their taxes have over businesses that are complying with their tax obligations, albeit for some in very difficult circumstances. The ATO also believes the impact of the disclosure to the CRBs on the credit rating of those non-complying businesses will act as an alert to suppliers who will be able to reassess their willingness to continue to trade with the defaulting taxpayer.

We know the changes to a businesses credit rating and the flow on effect to the directors associated with those businesses will have a significant impact. As recently stated in Robert Gottliebsen’s article for The Australian:

“The Australian Taxation Office is set to drop the equivalent of an “atom bomb” on a large number of Australian taxpayers – often linked to small and medium-sized enterprises.

Once the ATO presses “the bomb release button” on a taxpayer, for the next five to 10 years that taxpayer will not be able to gain a loan from a bank or most finance providers; obtain a credit card; run a business; buy a house (unless they can pay in cash) and even rent a dwelling.”

When considering this $100,000 threshold, the ATO will include:

• income tax debts
• activity statement debts, for example, GST, PAYGW
• superannuation debts
• fringe benefits tax debts, and
• penalties and interest charges.

Whilst Gottliebsen’s article is alarming, it’s a stark reminder for those who find themselves in the above position to take action immediately in order to avoid such consequences. We’ve summarised what you can expect on behalf of clients in terms of process and potential outcomes, as well as ways in which you can help to get them through this situation and come out the other side as unscathed as possible.

What happens if your client has significant ATO debt and can’t afford to pay up?

Where the ATO has selected a business who meets the disclosure criteria, an orange-coloured warning letter will be issued. A further grace period of 28 days is allowed before CRBs will be notified, which we expect may have a terminal effect on that business’s cashflow once general trade creditors become aware.

Details of this debt disclosure program can be found in our previous blog “Coming Clean On Tax Debts”.

Further reading can also be found on the ATO’s website here.

For those businesses with debts over $100,000 who wish to have the ATO compromise its debt and enter into a repayment program, they will need to speak with an ATO officer as an automatic repayment program payment option is not available. The ATO is unable to compromise any primary tax debts due; flexibility only exists regarding penalties and interest in the absence of a formal insolvency appointment. The ATO will also likely require that all of the tax lodgements are up to date.

If a repayment program cannot be obtained or the necessary lodgements are not done, then those directors may find themselves on the receiving end of a Director Penalty Notice (DPN). A DPN is a formal notice issued by the ATO upon directors of a company to hold them personally liable for specified tax liabilities of their company. There are two types of DPNs: lockdown and non-lockdown DPNs.

• An automatic lockdown DPN is issued to directors where the company has failed to report its:
  • BAS within three months of the due date; or
  • SGC Statement by the due date;
  • and the debts remain unpaid.
• A non-lockdown DPN is issued to directors where the company has reported its BAS within three months of the due date or its SGC Statement on time but the obligations remain unpaid.

From 1 April 2020, the ATO’s DPN regime made directors personally liable for debts, amongst others, arising from unpaid GST, PAYG and SGC obligations.

It is an unfortunate side effect of business shutdowns during 2020 and 2021 that many directors have failed to lodge their returns with the ATO on time. This will have triggered their liability under the automatic lockdown DPN regime.

What are the options once a DPN is received?

To avoid personal liability	SGC Liability	GST Liability	PAYG Liability
Statement Reported	Lodge by the due date	Lodge within 3 months of the due date	Lodge within 3 months of the due date
If reported properly (non-lockdown DPN)	Before DPN issued, or within 21 days of the date of the DPN, pay the due amount disclosed in the DPN, or appoint a liquidator or voluntary administrator to the company
If lockdown DPN issued	Pay the due amount disclosed in the DPN

It’s important to note that as the debt becomes a personal liability of its director, if the debt is not paid then it can result in the bankruptcy of the director.

Non-payment of taxes is just one sign of an underperforming business. The earlier businesses seek professional advice, the higher the chance of rehabilitation. Ignoring a debt to the ATO is now no longer an option.

What should accountants do to help clients who find themselves in significant ATO debt?

If you have a client who has:

• Tax debts
• Deferred debts (eg landlord exposure)
• Received a DPN
• Wishes to ‘right size’ its debt profile to suit its current cashflow

you should promptly make contact with our office to discuss their circumstances and how we can help.

Early advice increases the likelihood of your client surviving. Do not let your clients adopt a ‘head in the sand’ approach, hoping that things will improve – they rarely do.

Some of the warning signs of insolvency are covered off in our blog “Early Warning Signs” which include:

• Making a loss over a sustained period
• Increasing bad debt
• Threats of legal action from creditors
• Increased usage of new suppliers
• High staff turnover

In the current climate we expect that many clients will have debt deferment arrangements in place (particularly with landlords), which will result in net asset deficiencies within their balance sheets. These need to be addressed. For some, the option of entering into a Small Business Restructure (SBR) process can appear attractive. Details of this process can be found here.

Where a restructure process is looked at, we have the ability to work with you to assess your client’s eligibility to enter into a SBR and the levers able to be used to save it, such as:

• director capabilities
• sources of funding
• cost out programs
• revenue enhancement opportunities

As always, we are here to provide guidance and support to both you and your clients. Get in touch to discuss how we help find the best solution for your situation.