Small businesses did it tough during the height of the COVID-19 pandemic, and to support them, the Australian Taxation Office (ATO) eased off on its debt collection activities. After all, it’s understandable that tax debt management wasn’t their top priority. Since May 2022 however, they’ve been back with a vengeance and are actively pursuing the recovery of billions of dollars in outstanding tax liabilities .
To help small businesses who find themselves saddled with business tax debts, our expert commercial lawyers break down different tax debts, present tax debt solutions and explain strategies for tax debt negotiation with the ATO.
What Are Company Tax Debts?
Unlike individual tax debts (where the ATO may ‘release’ the debt if paying it would leave you bankrupt and unable to provide for your family) business tax debts can be pursued relentlessly, culminating in director penalty notices, public disclosure of business tax debts, wind-up action and more. These actions can have disastrous consequences for your business and personal life, so if you’re running a business, understanding these four main factors that lead to a business tax debt is essential knowledge.
Here’s how to avoid a tax debt with the ATO:
Pay Your GST
Businesses that collect GST are required to pay it (less any credits) to the ATO either monthly, quarterly or annually depending on their turnover.
Collect PAYG Withholding Amounts
Pay As You Go (PAYG) withholding means the payer of the income, not the recipient, pays the tax directly to the ATO on behalf of the employee or contractor.
Pay Superannuation On Time
It’s compulsory for all businesses to pay an employee's minimum superannuation guarantee amount on time and to the right fund. If you don’t pay, or you’re late, you might have to pay the superannuation guarantee charge (SGC).
Know Your Company Tax Rate
In Australia, the full company tax rate of 30% applies to all companies that are not eligible for the lower company tax rate. Failure to pay the correct amount of tax on your revenue can lead to an ATO tax debt management problem.
How To Deal With A Company Tax Debt
If you get a tap on the shoulder from the ATO (usually via a letter or a phone call) notifying you that your business has a tax debt, start dealing with the issue proactively and immediately. The worst thing you can do is stick your head in the sand and hope that it goes away. Be open and transparent with the ATO, engage a business accounting specialist , and seek legal advice if things have gotten out of hand and you’re going to default.
In most cases, these will be the four options available to manage an ATO business tax debt.
1. Deal With the ATO Directly
The tax office doesn’t like to be ignored and they will not help those who don’t engage with them. Their preferred approach is always to work with taxpayers to resolve their situation through engagement rather than enforcement. Engage early, directly and transparently. Tell the ATO if your business has been struggling, explain when you will be able to start repaying the debt and if you’re otherwise in good standing with them, you may be able to get favourable treatment including a remission of the General Interest Charge and any penalties .
2. Go On a Payment Plan
The longer you take to pay off your debt, the more you’re going to spend in interest. While you could explore a business loan to pay your tax debt, going on a payment plan with the ATO is likely going to save you money and be better for your business cash flow. Sole traders and some businesses can self-serve and create a payment plan online with payment terms spread across 2 years. In some exceptional cases, the ATO will grant up to 5 years for a business to repay their tax debt.
3. Manage Insurmountable Debt
Companies facing insurmountable debt will have to be put into voluntary administration. If your tax debt is insurmountable, a small business restructuring practitioner may be able to assist. Alternatively, liquidators will be appointed to sell the company's assets and distribute the resulting funds to the company's creditors, of whom the ATO is usually the biggest.
In this situation, quarantining the debt is important to ensure it isn’t put on the directors personally.
4. Challenge The Debt
While it’s unlikely, there’s always a chance that the ATO or your accountant has stuffed up somewhere and your debt amount is actually lower. If you suspect this could be the case, you can request to have your debt reviewed in an attempt to reduce your assessment. This is an expensive option as you’ll have to pay an accountant for a full audit of your tax affairs and potentially incur interest charges, as well as losing any favourable treatment from the ATO if they determine the debt is payable in full.
What are ATO Director Penalty Notices?
As we said earlier, the ATO is back with a vengeance when it comes to debt collection and has sent approximately 80,000 letters to company directors warning them of the risk of receiving a Director Penalty Notice (DPN) in relation to unpaid company tax debts. A DPN is a formal notice issued by the ATO upon a company director which holds them personally liable for company tax debt, and the ATO has sent around 50,000 of them since 1 June 2022!
Defending a Director Penalty Notice
If you’re planning to defend a DPN, it’s important to seek legal advice. But here’s a few things you can base the defence of a DPN on:
- The debt arose due to illness
- All reasonable steps were taken to pay debt
- All reasonable steps were taken to appoint voluntary administrator or wind the business up
- All reasonable steps were taken to ensure the company complied with obligations to pay
- The Director wasn’t in control of the company at the time the debt arose.
While defending a DPN is an option, it’s also possible to negotiate a mutually beneficial outcome with the ATO. This might be a lump sum payment for some of the debt and a payment plan for the remainder. Remember, it’s important to engage with the ATO as soon as possible to get the best possible outcome.
Talk To BlueRock’s Expert Business Advisors About Your Tax Debts
If you’re struggling with a business tax debt or any other business problems, BlueRock can help. Book a consultation using the form below to talk through your issues and let us find the right solution to get your business back into growth mode.
