Fortunately, the Australian economy is returning to a semblance of normality after months of lockdowns and trading restrictions. As double dose vaccination rates push beyond 90%, businesses in hospitality, ‘non-essential’ retail, events and travel that have been shuttered since mid-2021 are now welcoming back their customers. But for many, the long road to business recovery is only just underway. Dealing with a build-up of unpaid ATO debt is an issue that will weigh on the recovery prospects of large numbers of struggling businesses. The ATO has recently started to ramp up its tax collection efforts. What can SME business expect?
In March 2020 the ATO wound back contact with tax debtors in response to the pandemic.
Limited engagement resumed in July 2020 but the focus at that time was mostly upon understanding individual circumstances of tax debtors and what could be done by way of assistance to get the taxpayer back on track.
In March 2021 the ATO resumed issue of warning notices, primarily to taxpayers who refused to engage with them. The following month (April 2021), penalty notices started to resume in a low key manner.
The ATO expects all businesses to lodge their BAS and IAS returns (SGC statements also, if applicable) on time, even where they cannot pay the outstanding debt. IRT Advisory urges all taxpayers to comply with this expectation – it’s not only the law, it will also help you get a better result in the long term. The ATO reserves a special antipathy toward taxpayers who do not engage with them.
Payment plans are likely to be offered to businesses forced to close by covid lockdowns. The expectation is that the plan would be tailored to the taxpayer’s expected cash flow – so if your cash flow is poor, argue the case for extended terms of payment.
The ATO’s online system will enable set up of payment plans that fall within a range considered acceptable by the algorithms that drive it. Taxpayers who seek a longer deferral period than that offered online should proactively contact the ATO by phone to discuss their options.
It’s standard procedure for the ATO to charge interest, known as GIC or ‘general interest charge’ on overdue tax debt. Currently that rate is 7.04% p.a. The rate changes quarterly but has been around 7% p.a. for a while.
While the ATO typically does not reduce or waive principal tax debt, there is greater scope to negotiate a reduction of GIC.
If you wish to explore this option, please contact us. We do not undertake GIC negotiations directly with the ATO but we will be pleased to refer you to a specialist who does.
In addition to interest charging, tax debtors should expect to be contacted regularly by the ATO via all the communication channels available – MyGov, SMS, telephone or letter.
If you’re owed a refund on your personal income tax account but your company has a tax debt, expect that the ATO will set off your personal refund against the company’s unpaid liability.
In some cases it may be worth considering lodging a return that is expected to deliver a refund (for example, your personal return) ahead of a return on another entity (say a company you control) where a tax debt is expected.
Beware the dangers of entering a payment plan with the ATO just to ‘buy time’ but where there is no realistic expectation it can be met! If you do so for your company and your company later goes into liquidation, payments made in the 6 months prior to winding up may be subject to recovery by the liquidator as preferential. The ATO can then seek to recover any amount it pays to the liquidator from you again, so you may end up paying twice!
You can expect your tax debt to be referred for ‘firmer action’.
The ATO uses a range of tactics, including a Director Penalty Notice, statutory demand, garnishee (lawful seizure) of money held in your company’s bank account or trade debts owed to it by customers, and in the most serious cases, an application to court to wind up your company.
In the case of individual debtors, bankruptcy action may be considered in the worst cases.
In normal (pre-covid) times, the ATO was, and we anticipate will once again in time become, the most prolific applicant for winding up orders in the court system. However, at present the ATO is virtually absent from the market. In our view, this is a primary reason why the level of corporate insolvency in Australia currently is at lower than normal levels, notwithstanding the likely number of business failures arising from covid lockdowns.
Frankly, the ATO does not care who pays. If you’re a joint director of your company with one or more other people and DPNs have been issued against all directors, the ATO expects you to work out with the other directors how to meet the obligation.
A joint liability enables the ATO to proceed against any or all directors to recover the debt owed. Naturally, a wealthy director potentially has more to lose that one less well off! This may not seem fair, but it’s the way it is.
We understand that the ATO has been supportive of most Small Business Restructuring plans. Having said that, there have not been very many plans put forward for creditor consideration to date. It remains to be seen whether in the long term, Small Business Restructuring Plans are useful to struggling small business operators.