An increasing number of SME business are facing compounding debts and are struggling to stay above water. Rising interest rates, increased cost of supplies and employees demanding higher wages are all contributing to this. The Australian Taxation Office (ATO) has now resumed its debt collection activities following a relatively quiet period during the pandemic, warning directors of companies to actively manage their tax lodgements and business debts or face ATO action.
Here we consider some key indicators of financial distress and how to get back on track, consequences of unpaid company tax obligations and your options when insolvency is imminent.
When assessing the health of your business, cashflow is key. If you’re struggling to pay tax obligations, defaulting on your rent or lease, extending creditor payments or moving frequently into overdraft, you might be facing bigger issues.
If this sounds familiar, there are some strategies you can implement to boost your cashflow:
- Send out more regular invoices to customers.
- Regularly monitor your debtors and stay on top of your collections.
- Review stock to see if there is any that can be sold quickly.
- Consider whether you have assets or equipment that are no longer used and can be sold.
- Reconsider your loans – can you refinance for a better rate or longer term?
- Review your pricing structure – how long has it been since you’ve raised your prices?
It’s also wise to seek professional advice from a business advisor or accountant at this stage, particularly if you find managing cashflow and responding to debts and other financial aspects of the business stressful.
ATO debts and the Director Penalty Notice
The ATO is taking a more assertive stance with debt collection now that COVID-19 has subsided and if your business is already struggling in the current environment, ATO debt collection activity will likely cause some stress.
Recently, the ATO communicated that it was issuing an average of 50 director penalty notices (DPNs) a day during the months of March through to May, and is now issuing on average 150 a day to boost tax collections and increase accountability.
If a company has unpaid tax obligations including superannuation, PAYG withholding and GST, its directors can become personally liable for a penalty equal to the value of the unpaid amount.
Before recovering these penalties, the ATO must issue a DPN. There are two types of DPNS; a lockdown DPN and a non-lockdown DPN, both of which have serious implications and can result in directors incurring personal liability for tax debts.
The lockdown DPN
This penalty notice has become more prevalent as the ATO target directors of companies that have failed to lodge their business activity statements, instalment activity statement and superannuation guarantee statements within three months of their due date for lodgements.
Upon receipt of a lockdown DPN from the ATO, the penalty of personal liability for the tax debt is enforced. The only way for a director to remit this penalty is by paying the debt in full or claiming a statutory defence. In the absence of payment in full, a director will face personal insolvency consequences.
The non-lockdown DPN
This penalty notice is issued to directors of companies where lodgements have been made within three months of their due date, however the associated PAYG withholding, GST and/or superannuation guarantee debts remain outstanding. Upon receiving a non-lockdown DPN, a director has four options available to avoid personal liability for the company’s tax debts: pay the debt in full or appoint an administrator, liquidator or small business restructuring practitioner to the company. It is no longer an option for a company to negotiate a repayment plan to extinguish the tax debts and thereby avoid personal liability for its directors.
A director has 21 days in which to respond to a DPN so it’s vital they seek immediate advice from an accountant or restructuring and insolvency practitioner as soon as possible.
An early discussion with the ATO will generally assist in the best outcome – often this will be a payment plan. To access an interest free payment plan with the ATO for your overdue activity statement, you need to meet certain criteria. Visit the ATO website here for more information.
If you do enter a payment plan it’s important you pay on time as the ATO will penalise you for defaulting.
If you’re unable to boost your cashflow, come to an arrangement with the ATO or perhaps your debts are getting beyond what your business can manage, it’s critical that you contact a restructuring and insolvency practitioner. This person will be able to determine the viability of the business and options available to alleviate the distress and minimise the risk of personal liability.
An experienced practitioner will be also able to advise on options to restructure your business including Safe Harbour, Small Business Restructuring, Voluntary Administration and a Deed of Company Arrangement.
Formal insolvency options are the last resort, which is why a good restructuring and insolvency practitioner will explore all other available options before commencing such an approach.
In some circumstance a business owner may also need to consider personal insolvency options.
Cash flow issues can’t be ignored but they can be managed if early action is taken. Company directors and business owners need to be particularly cognisant of the increased ATO debt collection activity and seek advice as early as possible if they or their business are facing financial difficulties.