May 10, 2024

ATO Tax Debt and Potential Penalties

Kyle Bonerath
Accountant & Registered Tax Agent

ATO Tax Debt and Potential Penalties

If your business is struggling with tax debt, the consequences and potential penalties from the Australian Taxation Office (ATO) can be daunting. The ATO has intensified its efforts to collect overdue tax debts in response to recent developments. This crackdown targets various tax liabilities, such as income tax, PAYG withholding, and unpaid superannuation guarantee contributions. We explore the multiple penalties the ATO uses for unpaid tax debt. 

Why are the ATO collecting tax debt?

Late last year, it was revealed that the ATO was taking a firmer stance on collecting overdue tax debt from businesses. This includes the continued heightened collection activity of debt that was put on hold during the peak of COVID-19. 

The collection activity has income tax in its sight, as well as PAYG withholding and unpaid superannuation guarantee contributions. 

What happens if you don’t pay your tax? 

The ATO has various tools for dealing with unpaid tax liabilities. The penalty level often depends on the taxpayers’ willingness to engage with the ATO to sort out their debt. 

You’re at risk of facing harsher penalties if you have defaulted on multiple payment plans, do not engage with the ATO to resolve your debt, or have been caught deliberately avoiding payment or undertaking phoenix activities to liquidate and rebuild. 

Some of the penalties the ATO are actively using in their debt collection include:

Director penalty notices (DPN)

DPNs are issued to company directors where the company has an outstanding tax liability. With a DPN, protection of personal assets via the corporate veil is no longer possible, and the company director is held personally liable for the tax debt of the company. Even if the company has been wound up, former directors are at risk of receiving a DPN — sometimes years after the wind-up!

Garnishee Notices

Garnishee notices may be issued to people or businesses that may hold money for you. Essentially, people holding money that you would expect to receive in the future — your customers or financial institution, for example — will be ordered to pay the money directly to the ATO rather than to your business. This scenario could be crippling for a business in regard to cash flow.   

For businesses, the ATO may issue garnishee notices to:

  • Your financial institution
  • Customers you trade with on credit terms
  • Merchant card facilities.

Reporting your debt to credit reporting bureaus

The ATO has the ability to report your tax debt to Australian credit reporting bureaus like Equifax, illion and Experian. This can have a significantly detrimental impact on your credit score, making future credit applications much more difficult. 

Direction to pay SGC

The ATO has the authority to issue employers with a direction to pay any outstanding super guarantee contribution within a specific timeframe. If received, it's crucial to comply with this directive by ensuring the full specified amount is paid. Failure to adhere to the direction constitutes a criminal offence and may lead to severe penalties or imprisonment. It's essential to address any outstanding SGC obligations promptly to avoid legal repercussions.

Legal action

In some cases, if you owe taxes, the ATO may take legal steps to get the money back. What happens next depends on who owes the money — whether it's an individual, a business partnership, a trust, a super fund, or a company. They might start by filing a claim with the court, which could lead to actions like selling your assets if you can't pay. If you're a company and you don't pay what you owe, they might demand payment or threaten to shut down your company. If things get really serious, they could ask the court to declare your company bankrupt, and then sell off its assets to cover the debts. So, it's important to deal with any tax or super debts promptly to avoid legal trouble.

General interest charge

Before the ATO implements harsher penalty measures for tax debt, outstanding debt may accrue a general interest charge (GIC). In the past, many business owners have been happy to treat this GIC as a sort of business finance — the debt was tax deductible, and there was no need to apply for business finance elsewhere. However, the GIC is sitting at 11.34% for the June ‘24 quarter, with proposed legislative changes to take effect next year denying a tax deduction for GIC. The prospect of a non-deductible interest charge of around 11.34% has many businesses seriously reconsidering how they manage their tax debts, with many seeking finance to repay their debt.  

Protect your interests

It's essential to have a clear understanding of your obligations to the ATO and the extent of your personal liability. Take stock of any director guarantees you've provided to suppliers, as they could impact your individual liability. 

Before accepting a role as a company director of an existing company, assess the financial obligations of the company, as new directors may inherit existing debts. Similarly, if you've stepped down from a director position, remain vigilant about any correspondence related to your past role.

Reach out if you need help 

One of the main messages to take from the ATO’s firmer stance on debt collection is that it’s possible to avoid harsh penalties if you’re willing to engage with them and commence a payment plan. 

There are ways to remove the overwhelm associated with managing tax debt including cash flow forecasting or potentially business finance. 

If you’re struggling with cash flow or tax debt, please get in touch with us for advice. 

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