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01 Aug 2021

The ATO’s approach to debt collection and small business insolvency will seismically shift

Despite volatile lockdown circumstances, a 'wait-and-see approach' won’t pay off.

The Australian Taxation Office’s (ATO) representatives indicate collection procedures will soon be accelerating with its collections department back to full-time status and the “soft communication process” with business tapering.

This translates to seismic shift to approaching debt collection and momentum gathering for ATO-initiated insolvencies (being bankruptcies[1] and company wind-up applications). These are expected to start during 2021’s last quarter. Looking at the ATO winding up applications data we’ve collated (since July 2014), the long-term average prior to COVID-19, was anywhere between 150-200 winding up applications per month. Between April 2020 and June 2021, the ATO only filed seven applications—the furthest cry possible from the norm.

Community confidence in the ATO is important as any perception of taxpayers not being held to account through prolonged non-debt collection activity can diminish confidence; and jeopardise voluntary compliance levels, which our tax system so heavily relies upon.

Professionals within our networks are certainly reporting that the ATO is planting the seeds for debt collection as its activity steadily increases week by week. Those seeds are germinating into formal letters for late lodgements or payments and interest waiver requests /repayment plan negotiations becoming more difficult to achieve.

Clearly now is the time for these proactive solutions:

  • To reduce/remit general interest charges and/or penalties—propose a repayment plan.
  • To compromise principal tax debt—leverage the voluntary administration (VA) regime or small business restructuring process.
ATO representatives made it clear that without a formal insolvency appointment, the ATO is not in a position to compromise principal tax debts. Its approach considers the company’s pre-COVID-19 compliance history and is more supportive of Deeds of Company Arrangement (DOCA) under a VA if tax debts were newer—i.e. debts incurred in 2020 compared to debts incurred in 2018. While the ATO is issuing warnings of potential future action, where appropriate the focus remains on assisting. Particularly for businesses that qualify for the small business restructuring process or simplified liquidation to meet tax lodgment criteria; which aligns with the small business insolvency reforms’ intent for small businesses, its creditors, and its employees to get the benefits of:
  • reduced costs
  • shortened turnaround times
  • increased and easier access
  • retained control by business owners/directors (through the debtor-in-possession model).

To date, of the 11 small business restructuring plans proposed to the ATO, it has only voted against one. This reflects the ATO’s appetite to support businesses as we still work through the pandemic’s impact, something which may fade as time goes on and the tax debt gets older.

The ATO also tends to mandate that a condition of it supporting any compromise on tax debt is that future tax obligations are lodged and paid on time. Other than proactively dealing with tax debt and obligations, it can avoid potential personal liability of company tax debts.

Our expert teams expect that the ATO’s increased activity will then lead to further enforcement actions such as garnishee notices and director penalty notices (DPNs) where debt has been outstanding for some time and taxpayers’/tax agents’ communication is poor or non-existent.

It is critical for all taxpayers, but particularly company directors, to ensure tax lodgments are up to date and lodged on time to avoid personal liability for company tax debts through the DPN regime.

The consequences could be severe particularly given the DPN regime includes GST debts as of 1 April 2020. Yes, the ATO is only in the beginning of its journey to normal debt collection activities but waiting until the 11th hour (i.e. the last quarter of 2021) is an overall “no” for those wanting to make good, commercially-sound decisions.

The time has finally come for COVID-19’s tax, and pre-COVID-19 tax to be repaid. A “wait-and-see approach” simply won’t pay off and continued deferrals will only bolster complacency and future stress within business operations and cash flow.

Getting ATO support in all likelihood won’t get easier as time goes on. While lockdowns circumstances are volatile, we encourage professional advisors to start this conversation with their clients.

Our message is to limit as much exposure to personal liability as possible, and to leverage insolvency restructuring solutions or get an informed assessment of your clients’ financial position and potential to negotiate a deal with the ATO.

Worrells is here to help in those conversations and to navigate the way through these challenges.

Related articles/resources:

Deed of Company Arrangement: COVID-19 case study

Director Penalty regime extended to GST, WET, and LCT

Worrells Guide to Corporate Insolvency

[1] Personal tax is also being addressed in debt collection. This article focuses on company tax and obligations.

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