Negotiating with the ATO: Beware Personal Liability
2 May 2017
A company has an ongoing obligation to maintain its taxation lodgement and payment obligations with the Australian Taxation Office. When a company falls into arrears in payment of its taxation liabilities, the debt will accrue with the ATO and will attract an interest charge known as General Interest Charge ("GIC") which is calculated on a daily compounding basis and is periodically added to your account.
What can be done when there is an outstanding taxation liability?
If your company has an outstanding taxation liability and you are unable to pay the debt in full, you may be able to negotiate a payment arrangement with the ATO. Prior to agreeing to a payment arrangement, the ATO may request financial information to ascertain if the business is viable and whether you are able to adhere to the terms of the proposed arrangement. Interest will accrue on the debt and the ATO may impose stricter terms if you default on any of the payments.
It is important to continue to maintain your lodgement obligations, even if you are unable to make payment at the time of lodgement – your lodgement compliance will be taken into account in the event of dealing with a Director's Penalty Notice (DPN).
Continued communication with the ATO is important and may be taken into consideration if other avenues of recovery are pursued at a later date.
What happens if the ATO won't accept an arrangement or if the arrangement defaults?
There are circumstances where the ATO may need to take stronger action. This usually involves the ATO issuing:
- Garnishee Notice
- The ATO may issue a Garnishee Notice to an organisation that holds money for the company or may hold money in the future, such as Financial Institution or trade debtor, to cause the money to be paid directly to the ATO to reduce the company's debt.
- Directors Penalty Notice (DPN)
A DPN causes the company's Director to be personally liable for a penalty equal to the amount of the company's unpaid Superannuation Guarantee Charge and/or the unpaid PAYG withholding amounts. The ATO may issue a DPN to allow them to commence legal proceedings to recover the debt.
Other action the ATO may take to recover the company's debt include:
- Statutory Demand for Payment
The ATO may issue a Statutory Demand for any unpaid tax which gives the company a 21 day period to make payment or to negotiate a payment arrangement.
- Initiating Winding up proceedings
If the company is unable to make payment to the ATO after a Statutory Demand has been issued, or negotiate a payment plan with the ATO, the ATO will use this failure to pay as evidence of the company's insolvency and may apply to the Federal Court for the company to be wound up.
When the company's ATO debt becomes a personal debt
As mentioned above, a Director needs to be cautious in dealing with the ATO because of the provisions that allow the ATO to issue a DPN to apply the company's debt for outstanding superannuation guarantee and unpaid PAYG withheld to a penalty debt against the Director personally.
Once a DPN has been issued, the options available will depend on the company's historical lodgement compliance – i.e. whether the company's PAYG and SGC were reported to the ATO within 3 months of the lodgement due date.
1. Tax Lodgements made within 3 months
The options available to a Director in these circumstances are to:
- Arrange for the company to pay the debt to the ATO; or
- Place the company into external administration.
2. Lockdown situation - Failure to comply with Tax Lodgements
Where the company has failed to comply with its lodgement obligations and report its PAYG and SGC debts to the ATO within 3 months of the lodgement due date, the only option available is to arrange for the payment of the debt in full. If the company is unable to pay the debt in full, the Director will be personally liable for the debt.
This highlights the importance of a Director ensuring the company complies both with its taxation payment and lodgement obligations.
It is vital that Directors ensure their company is complying with its taxation lodgement and payment obligations to avoid the risk of becoming personally liable for the company's debt. If the company is experiencing financial difficulty and is unable to meet its obligations to the ATO it is important to act immediately and proactively and obtain professional advice about the best course of action in your circumstances.
If you have already been issued a DPN, it important to obtain advice as soon as possible (and prior to the expiration of the 21 day period) about the best course of action in your circumstances.
Acting promptly will not only ensure you fulfil your duties as a Director and minimise the risk of becoming personally liable for the company's debt to the ATO, but allow the greatest possible likelihood of being able to achieve a successful restructure and save the business and company.
Contact Rodgers Reidy now for a confidential discussion in relation to your business circumstances.
1. ATO - Director Penalty Regime - guide for Directors
2. ASIC Information Sheet 42 - Insolvency: A guide for directors