The ATO is increasing its debt recovery activity – is your business ready?   

Key points

• The ATO is ramping up recovery from small businesses, to combat rising tax debts 
• Business owners having not met tax obligations may receive a Director Penalty Notice (DPN) 
• Timeliness is key, with missed lodgement deadlines carrying heavy financial implications. 

In recent months, the Australian Taxation Office (ATO) has significantly intensified its efforts in debt recovery. Consequently, an increasing number of small businesses owners are now being issued Directors Penalty Notices (DPNs) and are forced to contemplate the possibility of seeking insolvency guidance. This situation is likely inducing stress in some businesses because it potentially entails transforming a corporate tax obligation into a personal one. But what precisely is a DPN, and what implications might it have for both you and your business? Furthermore, what alternatives are at your disposal to address potential financial ramifications? 

What triggered the recent ATO activity?

The heart of the issue lies in the astounding increase in tax debts owed to the ATO since the onset of COVID in 2020. Over the past four years tax debt has surged by a staggering 89%, reaching $50.2 billion in June 2023. Small businesses bear a disproportionate burden, accounting for over $33 billion of this total. 

At the Tax Institute’s 2023 Tax Summit, ATO Deputy Commissioner Vivek Chaudhary labelled the escalating debts owed by both companies and individuals as “concerning and unsustainable,” with small businesses identified as the primary contributors to this crisis. 

The ATO has also forewarned of further escalation with an estimated 500,000 late lodgements anticipated under the ATO’s Small Business – Lodgement Penalty Amnesty Program before the temporary relief expires on 31 December 2023.  

ATO debt recovery strategies

In response to these growing concerns, the ATO has left no room for ambiguity regarding its intent to recover debt from small businesses. They have implemented several strategies, including: 

1. Director Penalty Notices (DPNs)

After a period of relative inactivity during COVID, the ATO issued a significant number of DPNs in FY2022-23. This has continued in FY2023-24, with the ATO currently issuing approximately 60 DPNs per day. Once received, business owners have 21 days to respond and implement a repayment strategy with the ATO. A DPN can make a director personally liable for unpaid PAYG withholding tax, a Superannuation Guarantee Charge (SGC) or GST. Personal liability for GST will only apply for amounts due for quarters after 1 April 2020. 

The type of DPN that you might receive will depend on when the company reported its debts to the ATO and the type of debt.  It is imperative that businesses act quickly to avoid further penalty – ensuring postal addresses are correct and checked regularly is a simple and critical step in this process. 

Types of DPN

• Standard DPN: A Standard DPN applies when the relevant reports were lodged with the ATO within a certain period, but the amounts remain outstanding. If the ATO issues a Standard DPN, then you can avoid personal liability if you act within 21 days. 
• Lockdown DPN: Lockdown DPNs apply when the company lodges its statements outside of the specified periods. Under a Lockdown DPN, there is no ability to avoid personal liability by putting the company into liquidation or administration. If you are issued a Lockdown DPN, you will have to either arrange for the amount to be paid within 21 days, rely on one of the defences or otherwise challenge the DPN. 

2. Notices of Intent to Disclose Business Debts

Concurrently, the ATO is now acting on its capability to report delinquent companies owing $100,000 or more to registered credit bureaux, including CreditorWatch, Equifax, and Illion. The ATO has expressed a commitment to issue 50,000 “intent to disclose” notices to small businesses over the remainder of FY2023-24. 

3. Garnishee Notices and Statutory Demands/Winding Up Applications

While the use of garnishee notices has not been extensive, it was employed by the ATO pre-COVID. Under this practice, the ATO could garnishee bank accounts and debtors, sometimes without notice to the company, potentially causing serious cash flow issues.  

Despite only currently being responsible for around 1 in 6 winding up applications, the ATO intends to increase legal recovery actions to pre-COVID levels, with roughly 100 wind-up applications filed in July 2023 alone.

Critical questions for businesses and business owners  

For small businesses who may be at risk of receiving a DPN due to outstanding tax debt, there are three critical questions to ask: 

1. Have you assessed your tax obligation history and is there any outstanding debt or compliance concern that may need rectifying?

2. Have you updated your registered business address details with ASIC and the ATO?

3. If you employ a professional services firm to manage your tax obligations, have you reached out to them and implemented a plan to handle any DPN in a timely manner, so as not to miss the 21-day deadline set by the ATO?

Preparing for upcoming challenges

The ATO’s intensified activity coincides with an increasingly challenging economic landscape for small businesses, characterised by rising operating costs, higher borrowing costs, and subdued consumer demand. 

It is imperative that small businesses remain agile and are well-prepared to respond to the strict timeframes set by the ATO. Business owners must also take time to educate themselves on the risks and implications of these processes and what is required to ensure a business remains complaint. 

For instance, whilst the ATO’s Small Business – Lodgement Penalty Amnesty Program allows companies to remit outstanding lodgements without incurring late lodgement penalties, it does not provide relief against the issuance of DPNs associated with the same lodgements. Accordingly, Directors must exercise caution to avoid inadvertently subjecting themselves to a Lockdown DPN. 

What to do next 

Our specialist team of business recovery and insolvency professionals are here to help with any financial stress concerns, and can assist your business in: 

• Understanding and responding to a DPN (standard and lockdown)  
• Understanding or responding to an Intent to Disclose/File notice 
• Understanding the risks related to disclosure under the Small Business – Lodgement Penalty Amnesty Program. 

If you have any questions or concerns relating to ATO compliance and lodgement obligations, please reach out to your local Pitcher Partners expert today.