1. Worrying Times Ahead
As you are no doubt aware, the Australian Taxation Office (“ATO”) is finally ramping up its enforcement activity. This follows a hiatus of two years or so caused primarily by the COVID-19 pandemic. It started earlier this year with the issuance of awareness letters warning of the disclosure to credit agencies of business tax debts or the use of Director Penalty Notices (“DPN”). We understand that approximately 82,000 such letters were issued.
More alarmingly, it has come to our attention from numerous sources that the Registrars’ lists in the Federal Court and the Federal Circuit and Family Court are expected to be busy from October onwards. The implication was that these matters will relate to winding up applications and bankruptcy petitions respectively arising from the failure of taxpayers to comply with Statutory Demands or DPN’s issued by the ATO.
2. Statutory Demands
In order to wind up a company, the ATO will issue a statutory demand requiring payment of the outstanding debt within 21 days of issuance. The options available to the company are to seek to have the demand withdrawn, pay the debt or appoint an external administrator. If not complied with, the ATO will then file an application with the Court for the winding up of the company.
Importantly, if the option adopted is the appointment of an external administrator, then it’s crucial that the appointment is made before the winding up summons is filed. The reason is that the company cannot appoint its own Liquidator after filing has occurred and whilst it can appoint a Voluntary Administrator or a Small Business Restructuring Practitioner, on the return date of the application, the Court will need to be satisfied that the continuation of the administration or the restructure is in the best interest of creditors. That normally means the company is required to instruct solicitors and bear the consequent costs and risks for if the Court is not satisfied, then it’s likely the company will be wound up..
3. DPNs
There are two types; a 21 Day DPN and a Lockdown DPN. They can only issue in relation to unpaid PAYG withholding, GST and superannuation guarantee charge (“SGC”).
A 21 Day DPN is issued when a company has complied with its lodgement obligations within required time frames but not made payment of the respective amounts. The time frames are three months for BAS and IAS and one month after the end of the quarter for which the SGC statements relate.
A Lockdown DNP is issued when a company has failed to comply with its lodgement obligations within the required time frames and has not paid the respective amounts.
A director can avoid personal liability under a 21 Day DPN if within 21 days of receipt, the debt is paid or an external administrator is appointed to the company. The external administrator can be either a Liquidator, a Voluntary Administrator or a Small Business Restructuring Practitioner. Apparently, payment arrangements are no longer an option.
Unfortunately, the only option under a Lockdown DPN is to pay the debt, although defences are available such as illness.
4. Conclusion
The now aggressive policy of the ATO should come as no surprise. Presumably, other statutory bodies are also in the process of enforcing collection procedures.
At the risk of stating the obvious, if any of your clients receive a Statutory Demand (whether from the ATO or elsewhere) or a 21 Day DPN and they are unable to make payment of the debt, then they should seek urgent advice as to their options.
If we can be of assistance, then do not hesitate to contact a member of our team for a complimentary obligation free consultation.