The ATO has warned that directors must ensure the tax obligations of their organisations are being met and understand their liability for penalty notices.
The Australian Taxation Office paused most firmer debt collection actions (such as garnishee notices or wind-up applications) during the pandemic. While this was necessary to help businesses navigate a difficult time, it also had an impact on payment culture. An increasing number of businesses chose not to pay tax in full or on time.
We have now returned to business-as-usual debt recovery operations and expect all businesses that can pay, to pay — in full and on time.
The ATO prefers to work with taxpayers to resolve their situation through engagement rather than enforcement. But it is also the ATO’s responsibility to ensure a level playing field and support those who are doing the right thing, while taking strong action to deal with those who are not prioritising their tax obligations and refusing to pay their overdue tax and superannuation debts.
We use a range of targeted strategies to address the growth in debt, which is now approximately $50b. This includes actions such as issuing a director penalty notice (DPN) to company directors.
Director penalty notices
The penalty regime imposes a penalty on a director personally for certain tax obligations equal to the company’s liability. The director’s liability to a penalty arises automatically, by operation of law, as an important mechanism to ensure businesses do not get an unfair financial advantage and to protect employee entitlements.
Prior to issuing a DPN, debt recovery actions would have applied to the company. These may include letters, SMS or phone calls, as well as warning about further — firmer — actions. If a company doesn’t pay its debt and doesn’t contact the ATO to make other arrangements, a DPN may be issued to each current director as well as anyone who was a director at the time the company failed to pay.
For the period 1 July to 31 December 2023, we issued 13,648 DPNs to directors, relating to 10,041 companies, for a total debt value of $1.88b — of which $305.8m has been collected.
Director liability
Company directors must ensure tax and superannuation obligations are met on time and in full. Before becoming a company director of an existing company, it is important to check for any unpaid or unreported liabilities by speaking to a registered tax professional with the relevant authority to access these details.
New directors may be liable for director penalties for periods prior to their appointment. They have 30 days from their appointment to take steps to avoid becoming liable for prior director penalties, such as:
- Payment of debts in full
- Appointing an administrator or small business restructuring practitioner, or
- Beginning to wind up the company.
Directors are still liable for the company’s debt, even if they resign within the 30-day period. It is important not to ignore a DPN. If a director doesn’t take action in 21 days in response to a DPN, the ATO may take steps to recover the penalty liability from them personally, including by initiating legal recovery proceedings against the director.
Assistance is available
If a company can’t pay its liabilities, a company director needs to get in touch with the ATO or their registered tax professional before the due date to discuss support options. The ATO offers tailored support and assistance for those that need genuine help including payment plans and deferrals of payment or lodgement.
The ATO encourages companies to consider how they can meet tax obligations and manage cash flow. By paying tax in full and on time, companies can avoid unnecessary interest charges (currently 11.34 per cent and compounding daily) which will only add to their debts.
This article first appeared under the headline 'Directors on Notice’ in the June 2024 issue of Company Director magazine.
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