ATO tax collection policies post Covid stay-at-home orders and trading restrictions

ATO tax collection policies post Covid stay-at-home orders and trading restrictions

Businesses whose customers are crowded together in confined spaces have suffered most from the adverse effects of state government imposed Covid lockdowns and trading restrictions, particularly in Victoria and New South Wales. Now that restrictions have ended, what is the ATO doing to collect outstanding taxes from struggling operators?

Inflationary and interest rate pressures aside, the Australian economy is returning to a semblance of normality after two years of lockdowns and trading restrictions. With an approaching end to the ‘vaccinated economy’, the worst affected businesses in the hospitality, non-essential retail, events and travel industries are now in a rebuilding phase, albeit that many CBD hospitality venues remain closed or are still suffering from a ‘shadow lockdown’ due to (until recently) lingering state government imposed mask mandates for customer-facing staff and a reluctance by CBD office workers to return to the office 5 days a week.

Many businesses that have survived covid have only done so with the aid of government stimulus payments and the two-year absence of tax collection enforcement activity by the ATO. This has enabled large numbers of companies to stop paying their tax obligations, even where they can afford to do so. Plenty more so-called zombie companies that have ceased trading are expected to be wound up in the coming year with unpaid and unrecoverable tax debts. Many surviving businesses with accumulated tax debt will rely on improved trading conditions coupled with ATO payment plans to deal with their tax obligations.

ATO enforcement activity compounded by surging inflation, supply chain disruptions, labour shortages, rising interest rates and an anticipated crack-down on the tax treatment of family trusts will all create huge challenges to SME business survival.

The ATO is now ramping up its tax collection efforts. What can SME business expect?

Initial response

In March 2020 the ATO wound back contact with tax debtors in response to the covid 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.

Current activity

Company directors put on notice of increased enforcement activity

Anecdotally, we are aware that the ATO has recently issued tens of thousands of warning letters to company directors, urging them to actively manage their tax affairs or face further enforcement action, including Director Penalty Notice (DPNs).

Directors who have failed to notify ASIC of a change of address are especially at risk. Personal liability will apply upon expiry of a DPN where no action is taken, regardless of whether a DPN sent to the taxpayer’s registered office has actually been received by the director.

There is an expectation that this action will lead to a surge in insolvency appointments in the second half of 2022. Consequently, company directors should seek urgent professional advice if their tax affairs are unmanageable. Please contact us regarding any matter relating to tax arrears, for an initial discussion without cost or obligation.

Tax debt disclosure to credit reporting bureaus

Taxpayers who refuse to engage with the ATO risk having their debt information reported to credit reporting bureaus. At this time, we are aware that Creditor Watch has an arrangement with the ATO to list tax defaults. This could have a disastrous effect on your company’s ability to obtain trade credit.

Generally, a report would only be lodged if a tax debt of $100,000 or more is overdue by more than 90 days (and there is no engagement with the ATO). For more information, click here.

Attacks on family trusts

Recent media articles have highlighted an intention by the ATO to crack down on the tax benefits enjoyed by hundreds of thousands of SME businesses conducted through family trusts. A proposed reinterpretation of decades old trust legislation may act to deny the tax benefits arising from distributing business income through a family trust to adult children of directors of corporate trustees, many of whom are subject to low or nil marginal income tax rates on the income they earn directly. Such distributions are often made via book entries with no actual cash being handed over, or else are subject to setoff arrangements against expenses incurred in supporting the adult child with living and education costs.

Initially mooted as being retrospective for up to 8 years, the ATO’s current position is that there will be no retrospectivity.

The registration of tax agents who have set up clients in family trust structures may also be at risk.

It has been suggested by some commentators that an aggressive post-election stance on this issue from the ATO may result in a substantial increase in business failure. At the present time this is very much a wait-and-see situation.

The ATO’s expectation of struggling taxpayers

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 exhibits a degree of antipathy toward taxpayers who refuse to engage with them.

Payment plans are available and have been widely used by businesses disrupted by covid lockdowns. Plans should be tailored to the taxpayer’s expected cash flow. If your cash flow is poor, argue the case for extended terms of payment.

The ATO’s online system enables 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

What action is the ATO taking against taxpayers who cannot (or refuse to) pay?

The ATO charges interest, known as GIC or ‘general interest charge’ on overdue tax debt as a matter of course. At the time of writing the rate was 7.04% p.a. The rate changes quarterly but has been around 7% p.a. for some time.

While the ATO typically does not reduce or waive principal tax debt, there is currently considerable scope to negotiate 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. Or you may be able to negotiate waiver of GIC yourself by simply lodging a written request.

Entities with tax arrears must expect to be contacted regularly by the ATO via all the communication channels available, including 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.

Risks of a payment plan

Beware the dangers of entering a payment plan with the ATO only to ‘buy time’, 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!

A good time to restructure

There is now plenty of evidence the ATO is currently ramping up toward significant and aggressive enforcement action, albeit we are yet to see the ATO as the major applicant for winding up orders in the courts at the time of writing (immediately post federal election). We still see a better-than-normal window of opportunity for businesses with unmanageable tax debt to restructure their affairs through a deed of company arrangement or small business restructuring before the ATO’s willingness to favourably consider such arrangements is expected to diminish.

While the number of small business restructuring proposals put forward for approval since January 2021 has been relatively small, the ATO has supported the majority of such proposals to date.

We cannot predict with certainty the future ATO appetite for tax debt compromise arrangements via external insolvency administrations, but we suspect that the current levels of ATO tolerance for tax arrears will diminish as business conditions improve.

What action does the ATO take when taxpayers refuse to engage with them, or repeatedly default on payment plans?

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 the time of writing the ATO was virtually absent from the market. In our view, this is a primary reason why the level of corporate insolvency in Australia currently is at much lower than normal levels, notwithstanding the likely number of business failures arising from covid lockdowns.

How does the ATO treat a director penalty notice issued to two or more directors of the same company?

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. A wealthy director has more to lose than a director of modest means. While this may seem unfair, it’s the way the law works.