The small-to-medium business sector has had an extended holiday from active ATO debt recovery since the onset of the pandemic.  But now, more than two years after the pandemic changed our lives, the ATO has rapidly escalated their collection activity.  And they are using some powerful collection tools that were new or enhanced just before the pandemic, and thus had to sheath them.  Until now.

Blow-out in tax debt book

The focus here is on undisputed tax debts – debts businesses acknowledge they owe to the ATO, whether or not they are able to pay them.  Five years ago, the ATO’s undisputed debt book was $19 billion.  This year, it peaked at over $34 billion.  Of course, the holiday from usual collection practices had to come to an end.  However, instead of a dimmer-switch approach, progressively turning up debt recovery activity, the ATO has essentially just flipped the switch.  They’re entitled to do so, and businesses that have benefited from the temporary soft approach need to give attention to making good on outstanding tax debts.

Recovery tools

Two of the recovery tools in the ATO’s armoury are Director Penalty Notices (DPN) and reporting outstanding tax debts to Credit Reporting Bureaus (CRB).  These have been used sparingly since the start of the pandemic, but the ATO is now using them to full effect.

Directors of a company (including trustee companies) can be made personally liable for the company’s unpaid Pay As You Go (PAYG) withholding, Superannuation Guarantee Charge and GST liability.  This happens when the ATO issues a DPN to the director.  The number of DPNs issued has escalated, with 120 being issued daily last month, and now estimated to have reached 150 per day.

Being reported to CRBs could compromise a business’s ability to secure new finance or supplier credit, and cause complications with existing finance.

Clear message: Lodge + communicate

The ATO’s goal is to curtail the unfair financial advantage some businesses gain over others that pay their tax debts on time by using the ATO as a pseudo-source of overdraft funding.  Also, there is an obvious intent to provide a stern motivation to engage with the ATO to deal with outstanding debts in a timely manner.  The whole point of DPNs is to not have one issued to you, and the point of reporting tax debts to CRBs if for your business to not be reported.

A sound approach is to lodge all tax returns, Business Activity Statements and any other liability-establishing statements by their due date, whether or not you are able to pay on time.  And if you aren’t able to pay, communicate with the ATO to resolve a pathway for getting on top of the debt. But note that the ATO is noticeably taking a harder line on repayment terms, and you must have an agreed and compliant repayment plan to avoid a DPN or CRB reporting. DPNs have been issued to directors despite their businesses making voluntary payments against outstanding tax debts, as there was no agreed payment plan in place.  As a last resort, the ATO in recent years is open to accepting mortgages over real estate as part of facilitating repayment over a longer period.

Cashflow management

Cashflow is the lifeblood of a business.  Income and corporate tax, PAYG withholding, employee superannuation obligations and GST are all business-as-usual outflows.  However, there is a time gap between the point liability for these outflows is triggered and the deadline for paying them.  If you find yourself having to rely on that time gap in managing your cashflow, that’s a clear indicator of wider problems in the lifeblood of your business.

We can help

If you find yourself at risk of being issued with a DPN, or your business’s outstanding tax debts being reported to CRBs, the solution is to meaningfully engage with the ATO.  More broadly, successfully managing cashflow is essential in any business.  Talk to your Nexia Edwards Marshall NT advisor about how we can help you manage your business’s tax debts and cashflow.