ATO Debt Recovery Warning: Managing Client Exposure

By Mark Brereton
Business Recovery and Insolvency Director 03 9679 2360 [email protected]
20 April 2022

The Australian Taxation Office (ATO) has sent its strongest message yet in relation to debt enforcement since the commencement of the COVID-19 pandemic. As many as 50,000 directors were recently sent warning letters of an impending Directors Penalty Notice (DPN) and consequently potential personal liability for company tax liability pursuant to the DPN program if they don’t actively engage with the ATO and deal with the tax liability.

Recap - What are DPN's?

A “Non-lockdown” DPN can be issued on a director where a company has lodged with the ATO the following:

  • its business activity statements (BAS’s) and instalment activity statements within 3 months of the due date; and/or
  • its superannuation guarantee charge (SGC) statements within 1 month and 28 days after the end of the quarter that contribution relates to; and
  • has not paid the relevant amounts owed.

The DPN has the effect of making the director personally liable for the tax and/or SGC liability unless, within the 21 days from the date on which the DPN is issued to the director, the director:

  • pays the liability in full; or
  • places the Company into liquidation, voluntary administration or appoints a small business restructuring practitioner (SBRP).

A “Lockdown” DPN can be issued on a director where a company has not lodged its activity statements and/or SGC statements with the ATO within the above-mentioned timeframes and has not paid the relevant amounts.
The only option available to a director in receipt of a Lockdown DPN is to satisfy the debt or rely on a statutory defence (such as illness) if available.

What has changed in recent years with respect to DPN's?

The DPN program was changed in April 2020 to capture not only unpaid PAYG withholding and mandatory Superannuation, but also GST, Luxury Car Tax and Wine Equalisation Tax.
During the COVID-19 pandemic, the ATO suspended the program as part of the suite of support initiatives put in place by the government to deal with the impact of the pandemic. Notably, insolvency numbers have been half the usual annual nationwide average for the last 2 years.
In March 2022, the ATO signaled a recommencement of collections activity by way of the issuing of DPN’s. It is expected that the ATO will increase its firmer recovery action, including an increase in winding up applications issued, over the next 2 years.
Significantly, from March 2022 a director can no longer avoid personal liability pursuant to a Non-Lockdown DPN by entering into a payment arrangement for the outstanding ATO liability within the prescribed 21 days. By extension, entering into a payment plan with the ATO after receiving a DPN will not avoid the director from being personal liability pursuant to the DPN.

This change to the DPN program is consistent with the Federal Court’s decision in Clifton (Liquidator) v Kerry J Investment Pty Ltd, in that a payment arrangement does not cause a tax debt, which was due and payable to cease to be due and payable. If not addressed, this may have far reaching implications for directors including, but not limited to, what information is provided to credit reporting agencies and requirements to disclose personal liability when seeking finance. 

What do I advise my clients?

Accountants and advisors need to be pro-active in working with their clients who are experiencing financial difficulty by:

  • assessing their clients’ solvency and conducting a business risk assessment for director/s with large overdue tax debts, or with payment plans at risk of default;
  • advising their clients to only enter into payment plans with the ATO that are realistic, sustainable, and ultimately, that directors can adhere to for the duration of the payment plan; and
  • ensuring their clients’ address for service is accurately reflected in an Australian Securities and Investments Commission (ASIC) company director search. It serves as a pertinent reminder that if a director has not provided ASIC with their updated address for service, they will still be personally liable 21 days after the issuing of a DPN, even if they are unaware of the issuing of the DPN.

The PKF Melbourne Business Recovery & Insolvency team can assist you in assessing your clients’ solvency position, educating your staff on the options available to directors with solvency concerns, and if required, act in a formal appointment capacity to oversee a debt restructuring proposal.
In this regard, we have observed that the ATO has been generally supportive of formal restructuring proposals post-pandemic. 

Directors are on notice

The ATO has signalled to directors that they will commence enforcement action should they not address their tax debts. This will cause many directors to actively seek advice on the solvency of their business.  
As a director, should you have a tax debt, now is the time to actively engage with the ATO and not ignore it. If you don’t tell the ATO what is happening in your business and proactively organise a sustainable payment arrangement, and adhere to it, there can be negative consequences.

We encourage all accountants and advisors to review their client base, reach out to clients at risk, and seek the assistance of the PKF Melbourne Business Recovery & Insolvency team for advice.