When the ATO and Other Creditors Call – Do Not “Bury Your Head in the Sand”


“Burying your head in the Sand”

Incorrectly derived from the myth that Ostriches bury their heads to avoid prey, it is a common idiom meaning “a wilful ignorance or refusal to confront or think about a problem or unpleasantness”.

The reality is that even if you could bury your head in the sand, your problems wont go away and it makes it easier for you to be kicked in the rear or worse, run out of oxygen.

This affliction is not an uncommon one. Especially when directors are faced with a financial crisis.  It is appearing as a more common affliction as a result of the COVID-19 Pandemic, but why?

In our view, the “bury your head in the sand” mentality has been exacerbated by:

  • the general supportive nature amongst businesses
  • legislation that prevented Landlords from taking action and depending on the severity of financial detriment of the tenant, the subsequent waiver and deferral of liabilities.
  • Lenders taking a non-enforcement and more of a supportive stance providing deferrals and other relief measures.

However and most notably, the Australian Taxation Office has not been proactive in its recovery of debt, rather continuing to engage regarding compliance and supportive or arrangements and restructures.

All of these measures on top of the Jobkeeper and other Federal and State based assistance measures have been fantastic at supporting and ensuring the ongoing viability of businesses that would have otherwise failed or be struggling to a greater amount, with nasty flow on effects to unemployment and defaults with the Banks and Landlords.

However, just like the lockdowns, this will not last forever and as we move towards the National Plan for “opening up” directors should expect that these supportive measures will continue to be eased or removed.

Directors should also expect that amongst all of this, the sleeping giant in the ATO will recommence recovery action.  In conversations with our network including accountants, lenders, tax debt specialists and lawyers, as detailed in our previous blog it is clear that the sleeping giant has started to stir.

What does that mean?

It is a timely reminder that Company directors can be personally liable for unpaid PAYG, GST and SGC.

The law can be summarised as follows:

  • If a company fails to lodge their ATO obligations (i.e. BAS or IAS) within three months of the due date, the directors are automatically personally liable for the outstanding obligation (PAYG & GST). Notably, the GST only applies to debts incurred after 1 April 2020.
  • In relation to unpaid superannuation, if a company fails to lodge an SGC Statement within one month of the due date to the ATO, the directors are automatically personally liable.
  • If the obligations are lodged within the applicable time frame, but not paid, the ATO can still issue a Director Penalty Notice to the directors (at their address as detailed on the ASIC Register) requiring either payment within 21 days or the placing of the company into liquidation or administration to avoid personal liability.
  • The ATO now also has the ability to estimate the amount of unpaid PAYG and GST and pursue this debt pursuant to the Director Penalty Regime. This also applies to any amount due in respect of Wine Equalisation Tax and Luxury Car Tax.
  • Resigning as a director does not avoid liability to any debt incurred whilst a director.
  • New directors have 30 days to review company records to determine the company’s financial position. After this time frame, if they remain as a director, they will be subject to the Director Penalty Notice Regime in respect of liabilities that accrued prior to their appointment.
  • The ATO also has the ability to retain refunds due to the company in circumstances where not all lodgments are up to date.

If you have good compliance and have lodged all of your returns within the timeframes referred to above, you will not be made personally liable by operation of law.  However you may still be made personally liable by the ATO issuing a Director Penalty Notice for any of the arrears.  The main difference being that if everything has been lodged you will be afforded the opportunity to avoid personal liability by paying the debt, appointing administrators or liquidating the company prior to the expiry of the 21 day time starting from the date of the notice (not when it is received).

What should I do?

You get advice.  You DO NOT bury your head in the sand, this will not go away.

Early advice maximizes your chances of successfully establishing a position that deals with the debt and in many instances avoids any need for a formal insolvency appointment.  Our network consists of:

  • lenders who can assist in recapitalization, working capital requirements
  • tax debt negotiators who can engage with the ATO to negotiate an affordable payment plan including potential remissions of any penalties reducing the debt due,
  • accountants who can assist with your compliance and structure, whether it means bringing it up to date or ongoing compliance of both.
  • Lawyers who can assist with structures, legal documents and dealing with creditors, debt collectors, landlords etc

Should you require any further information in relation to the contents of this blog or any other insolvency related matter, do not hesitate to contact any of the six registered liquidators at Dye & Co. www.dyeco.com.au