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In times of financial distress, the Australian Tax Office (ATO) is often a business’s largest creditor, and with its recent return to stricter debt collection practices, small businesses are increasingly at risk. For business owners, staying proactive and understanding the consequences of ATO notices can make the difference between staying afloat and facing serious financial repercussions.
The team at Rapsey Griffiths has developed this guide to help you understand the impact of ATO notices and provide actionable steps to maintain compliance and protect your client’s business.
ATO’s New Approach to Debt Collection
On October 23, 2024, the ATO announced a stricter stance on unpaid taxes and superannuation debts, focusing on businesses who refuse to engage (ignore SMS and letter reminders).
After a period of leniency, the ATO is now resuming more rigorous debt collection, stating that they will move more quickly to firmer actions such as Director Penalty Notices (DPNs) and Garnishee Notices for businesses who don’t engage. More on what the ATO constitutes ‘engagement’ is provided below.
Why Compliance Matters:
Keeping a clean compliance history provides a level of protection if your client faces financial hardship. Businesses with a strong history of timely lodgments and payments are more likely to gain ATO support if needed, while those that ignore obligations may face harsher consequences.
Key Compliance Factors:
- Lodge BAS and SGC on time.
- Adhere to repayment agreements without defaulting. Do not propose payment arrangements that are doomed to fail, this will work against you in the long run.
- Take action early if your client’s business has faced previous financial difficulties.
For small businesses, non-engagement with the ATO can lead to serious notices, such as DPNs, Garnishee Notices, Credit Reporting of tax debt and Statutory Demands, each of which has unique requirements for handling. Here’s what each notice entails and how to respond effectively.
Navigating ATO Notices: Action Steps for Business Owners
- Director Penalty Notice (DPN): Understand Personal Liability
A DPN can hold directors personally liable for certain unpaid company debts, like GST, PAYG withholding and superannuation. There are two types of DPNs:
- Non-lockdown DPN: Issued if BAS and SGC’s are unpaid but were reported within three months and one month of the due dates respectively. Directors have options, such as paying in full, appointing an administrator or Small Business Restructure, or liquidating the company.
- Lockdown DPN: Issued if BAS are unpaid and unreported within the three-month period and SGC unreported within the one-month period. Here, the only option is to pay the debt in full to avoid personal liability.
Action Tip: Take immediate action within the 21-day period if receiving a DPN to prevent consequences. Ignoring a DPN can lead to personal liability.
- Garnishee Notices: Immediate Action to Secure Cash Flow
A garnishee notice allows the ATO to recover unpaid debts by accessing funds held by third parties, including banks or trade debtors. For small businesses with tight cash flow, this can have serious implications.
Action Tip: Validate the garnishee notice and reach out to the ATO to discuss alternative payment arrangements if possible. Acting quickly can prevent interruptions to cash flow.
- Statutory Demand: Avoid Insolvency Proceedings
If your business owes over $4,000, the ATO can issue a statutory demand for payment. Ignoring this demand can lead to a presumption of insolvency and potential winding-up proceedings.
Action Tip: Either pay the debt or set up a payment plan within 21 days to avoid insolvency assumptions. Engaging a restructuring advisor can help explore viable options if payment isn’t feasible.
- Credit Reporting and Tax Debt Disclosure: Protecting Your Client’s Business Credit Score
The ATO can now report unpaid tax debts to credit reporting agencies if:
- A business has an Australian Business Number (ABN),
- Owes more than $10,000 in tax debt, and
- The debt is over 90 days overdue without active engagement.
This disclosure impacts a business’s ability to secure financing or credit, underscoring the importance of maintaining good standing with the ATO.
What “Engagement” with the ATO Means:
- Setting up and adhering to a payment plan.
- Applying for tax debt relief if eligible.
- Lodging an objection or filing an appeal.
- Taking proactive steps to dispute any tax-related issues.
Practical Steps to Keep Your Client’s Business on Track
- Build a Proactive Compliance Strategy: Schedule tax reviews to ensure timely lodgement and payment. Consistency is key to avoiding penalties and maintaining a clean compliance record.
- Seek Professional Advice: If the business is struggling with tax debt, consider partnering with advisors experienced in ATO negotiations. A restructuring professional can provide insight into the best options for the business.
- Leverage Restructuring Tools: Whether it’s creating a new financial plan, reducing operational expenses, or exploring loan restructuring, a financial turnaround plan can provide a roadmap to recovery.
At Rapsey Griffiths Turnaround and Advisory, we specialise in guiding small businesses through financial challenges. From restructuring options to tax compliance strategies, we help businesses stabilise and regain control. Contact us today to learn how we can support your journey back to financial health and stability.