The Australian Taxation Office’s (‘ATO’)’s debt recovery strategy has been somewhat lacklustre (to use a neutral term) in the wake of the COVID-19 pandemic in the interest of allowing Australians an opportunity to recover from a litany of forced lockdowns. It is clear that the ATO’s “generosity” is now long gone, with the ATO recommencing a strategic and synchronised approach to debt recovery, which all businesses, directors and taxpayers need to be aware of.

BACKGROUND – ATO DEBT RECOVERY

During the COVID-19 pandemic, the ATO paused all debt collection activities with respect to the small to medium business sector. This decision was prompted by the disruptive effects of lockdowns during the pandemic, resulting in economic loss and a halt in business growth.

At the close of the 2022 financial year, the debt recovery pause left the total book debts at an unprecedented $66.6 billion, which is equivalent to an increase of 25.19% since the start of the pandemic.

As the Australian economy emerges from the pandemic, the ATO has taken active steps to resume its debt collection process.

DEBT RECOVERY STRATEGY

While the ATO is moving away from its temporary ‘soft’ approach, it aims to prioritise the tailored support and assistance of taxpayers to assist them in satisfying their overdue debts. While the ATO’s preferred approach to debt recovery is through engagement rather than enforcement, individuals who consistently evade the ATO may be subject to firmer actions.

ENFORCEMENT ACTIONS

The ATO’s debt recovery strategy post-pandemic revives former processes with a client-centred approach, while also introducing some new tools to assist. The strategy is summarised as follows:

Preventative Measures

1. Two key client awareness campaigns, encouraging taxpayers to engage with the ATO;
2. A redeveloped payment portal, simplifying the online payment process; and
3. The widespread integration of payment plans, tailored to suit the taxpayer.

Enforcement Actions

If taxpayers fail to engage with the ATO to satisfy their outstanding debts, enforcement actions may be escalated accordingly. In that respect, the ATO has the discretion to:

1. Issue garnishee notices and director penalty notices (‘DPN’);
2. Report outstanding tax debts to a Credit Reporting Bureau, if action to manage the debt is not taken within 28 days of receipt of a notice of intent; and
3. Otherwise commence legal action, including issuing summons for non-lodgments, and otherwise progressing personal and caproate insolvency action, including creditors petitions and winding-up proceedings.

DIRECTOR PENALTY NOTICES

Company directors have a legal responsibility to ensure that their company is abiding by the relevant legislation and its corporate governance obligations, to ensure Pay As You Go (‘PAYG’) withholding, Superannuation Guarantee Charge (‘SGC’) amounts or Goods and Services Tax (‘GST’) is paid.

For companies with outstanding tax debt obligations, the ATO may pursue the director of the company for the tax debt personally by issuing a DPN. A DPN informs directors of the specific tax obligations that the company has not met (i.e., with respect to PAYG, SGC, or GST), and holds them personally liable for those debts.

There are two types of DPNs, namely:

1.  A “Non-Lockdown DPN”, which can be issued if a company has lodged its business activity statements (BAS), SGC statements, and instalment activity statements within the statutory time limits, but has not satisfied the debt owed as a result of those liabilities; and
2. A “Lockdown DPN”, which can be issued if a company has not lodged its SGC or BAS statements within the statutory time limits and has also failed to pay the tax debt owed.

Historically, directors could avoid personal liability for a “Non-Lockdown DPN” by entering the company into a payment plan with the ATO. Now, a “Non-Lockdown DPN is only remitted if, within 21 days of the date of the DPN (and not the date it is served on the director), a voluntary administrator or liquidator is appointed to the company.

Despite the above, potential defences to a DPN may include:

1. That the director was suffering from some illness or some other reason for non-involvement in the company, which can be pleaded where a director can show that, either through some illness or other good reason, they were not involved with the management of the company and that it was reasonable that they were not involved;
2. That the director established that they took all reasonable steps to ensure that the company  subject to a claim for unpaid tax complied with their obligations under the relevant legislation; or
3. Pursuant to the SGC scheme, that the director applied the relevant legislation in a reasonably arguable way with respect to that guarantee.

If a company director has been issued with a DPN, they must take immediate action, including seeking legal advice to consider whether there are any defences available, or alternatively, negotiating a payment plan with the ATO. In the event that the director does not comply with the DPN, appoint a voluntary administrator or liquidator to the company, or raise one of the defences listed above in response to the ATO, the ATO may collect the debt from either the company or its directors through garnishees of bank accounts, tax credit retention, or by commencing legal action.

RAMSDEN LAWYERS – HOW WE CAN HELP WITH MATTERS INVOLVING ATO DEBT RECOVERY

Issuing a DPN is simply a procedural step, the ATO undertakes before it is able to commence proceedings against a director to recover a tax debt. To that end, it is vital that directors be mindful of their company’s tax lodgment/payment obligations and seek legal advice at the earliest available opportunity.

If you are looking to seek legal advice, Ramsden Lawyers are able to assist you. We are happy to arrange an obligation-free initial consultation to assist you in navigating the procedures set out under the relevant legislation for your circumstances. Our Litigation and Dispute Resolution Division has specific expertise in representing company directors in responding to DPNs.

For further information concerning litigation and dispute resolution at Ramsden Lawyers please follow this link.

The content of this article is intended to provide general guidance to the subject matter and must not be relied on as legal advice. Specific advice should be sought about your circumstances.