Update on ATO activity
ATO recovery actions and, in particular, when they may or may not recommence them, has been a matter of much discussion since the start of the pandemic. The onset of the COVID-19 pandemic of course saw a flood of Government support for the economy and, not surprisingly, a corresponding sharp decline in ATO collection activity. Indeed, large parts of the ATO debt recovery teams were seconded to other areas of the ATO, to support initiatives including the JobKeeper program.
But as we all knew, and as we’ve told our clients, the relaxed approach couldn’t go on forever…
The band is now very much back together. ATO recovery action has well and truly recommenced and most practitioners (our firm is no different) have had clients who have experienced this change.
Some may point to there still being little or no company wind up activity by the ATO. Whilst it is true that there have been virtually no applications by the ATO to wind up companies in liquidation in the best part of the last 2 years, this fails to appreciate the true nature of the way the ATO seeks to collect outstanding debts. The ATO collection process is founded on policy settings, that encourage taxpayers to themselves engage with the taxation office. Thereafter however there is an escalating list of recovery weapons that are utilised by the ATO – culminating in what is the tip of the spear, the wind-up application The winding up of a company is generally a weapon of last resort.
The ATO collection policy broadly involves the following recovery hierarchy:
- Standard lodgement or payment reminders (computer generated).
- Preliminary outbound ‘help and assistance’ phone calls from case officers (a gentle touch).
- Issue of failure to lodge warnings and penalties.
- Reporting business tax debts to credit reporting bureaus (in limited circumstances).
- Garnishee notices issued to a taxpayer’s bank or debtors (which can be catastrophic for small business).
- Directors Penalty Notices (DPN) which implicitly encourage the directors of a company taxpayer to voluntarily place a company into external administration.
- Statutory demands for payment.
- Wind-up applications.
Clients are now experiencing all parts of this debt recovery process other than, except in extreme cases, the final wind-up process. That last step is not far away…
Director Penalty Notice warning letters
Some CPN members will have recently had clients experience the receipt of Director Penalty Warning letters. These are a new initiative and appear to have been recently initiated in an attempt to combat the huge backlog of recovery work that the ATO is needing to embark on.
By all reports many thousands of such warning letters have been issued, commencing from late March.
The increased recovery activity and in particular the increased use of DPNs is a reminder for all our clients of the importance of minimising any exposure to lockdown DPNs by ensuring that:
- BAS lodgements are made by their due date or at the very least within 3 months of that day; and
- Superannuation Guarantee Charge (SGC) statements are filed by their due date (if applicable).
Changes to the DPN regime
A quick reminder that since the commencement of the COVID-19 pandemic, we have had two significant changes to the DPN regime:
Firstly, from 1 April 2020, the inclusion of net Goods and Services Tax (GST) (including Luxury Car Tax (LCT) and Wine Equalisation Tax (WET)) in the “basket” of taxes which can be recovered under the DPN regime. The amendment is not retrospective, meaning that a DPN is only able to be issued for debts relating to net GST for periods commencing from 1 April 2020. Importantly, these amendments apply to both taxpayer reported and ATO estimated net GST.
DPN’s now substantially cover the full gamut of ‘withholding’ taxes, that is those taxes where the taxpayer is receipting the taxes on behalf of the ATO, the full list of taxes now covered by DPNs is as follows:
- PAYG Withholding
- Net GST (including LCT and WET)
Secondly, removal of “entering into a payment arrangement” as one of the options available to avoid personal liability under a DPN, and replacing it with the company appointing a small business restructuring practitioner (SBRP).
A SBRP is a registered liquidator who oversees the formulation and implementation of a small business restructuring plan. In practice, these types of appointments haven’t been widely adopted given the conditions required to be met prior to their implementation.
We predict that the above changes will see a significant increase in ATO recovery action against directors personally and a corresponding increase in debtor driven insolvencies.
It is essential that directors seek advice as early as possible, ideally before a DPN has been issued, in order to mitigate the potential impact of the DPN regime on them personally. As always, please feel free to contact us.