Over years of insolvency administration, we have often seen businesses lodge Business Activity Statements but not paying the required liability. This is mainly due to the business being insolvent at the time and not having sufficient working capital or cash to make the payment. Obviously, and as you would expect, the ATO raises a liability which, if remains unpaid, leads to recovery action by the ATO. It is not uncommon for the ATO to be the largest creditor in a business failure.
Unfortunately some business owners wrongly believe that, if you do not lodge the Business Activity Statements, the ATO will not be aware of the liability and will not raise a debt on which to base any recovery action. The bad news for these business owners is a little thing the ATO calls Default Assessments. Interestingly some of these business owners are quite vocal to us in their objection to the ATO’s ability to do so.
Just because a business owner does not inform the ATO of a liability, the ATO is not prevented from making Default Assessments on what it believes the liability should be. In fact it is encouraged to do so.
This can mean that the ATO can make Default Assessments resulting in a liability which is higher than what might actually be the case and which would have been evidenced if the business owner had complied with his or her statutory obligations and lodged his returns in the first place. Such Default Assessments can lead to the commencement of recovery action and, in the case of a corporate debt, a Directors Penalty Notice being issued for the amount deemed payable through the Default Assessments.
So not telling the ATO of an unpaid liability is no better than advising a liability and not paying it. While both may lead to recovery action, at least by lodging the statutory forms it will be for the right amount.
On Directors Penalty Notices – in April this year we advised that changes were being considered to the provisions governing Directors Penalty Notices. These changes have been passed and are awaiting Royal Assent. They are the topic of another article in this e-Update.