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31 Jan 2022

Tax debts arising from ATO audits

Is my client personally liable?

Whether a director is liable for tax debts that were discovered during an Australian Taxation Office (ATO) audit goes back to the question of whether the original lodgment or lodgments made during the audited period were made on time. If a director shows a history of ATO compliance, it is unlikely they will be the subject of the stronger action policy, which includes holding directors personally liable for company tax debts through the issuing of lockdown and non-lockdown director penalty notices (DPNs).

It is important to remember that from 1 April 2020, directors can become personally liable for company GST (including LCT and WET) debts as well as unpaid PAYG and SGC. This additional exposure to incur personal liability for GST places greater responsibility on directors to get their company returns ready and lodge with the ATO on time.

What triggers an ATO audit?

The reason for an ATO audit may also impact on whether a director is personally liable for any debt that arises. Triggers may include:

  • Lodgment history including not paying on time, not paying the correct amount of superannuation, inconsistencies between a company’s business activity statement and their tax return.

  • Taxpayer’s behaviour including failure to declare income, disparity between income and lifestyle as well as claiming an excessive amount of work-related deductions.

  • Whether there was a tipoff or a complaint from a member of the public.

  • A random review.

What is a lockdown and a non-lockdown DPN?

While it was covered in previous On The Pulse Articles, a non-lockdown DPN or traditional DPN is a notice requiring the company to do what is required within 21 days, or the director faces personal liability, essentially removing the barrier between business and personal debts. This is issued when a debt is reported but remains unpaid.

A Lockdown DPN is issue when the debt is both unpaid and unreported and can only be set aside if the tax debt is paid.

Also worth noting is that the ATO is enforcing accurate debt reporting. Therefore, the tactic of utilising a nil BAS as a holding off lodgment to avoid DPN liability is no longer regarded as compliance by the ATO.

Worrells can help

If you’re concerned about your personal liability or your client for an ATO debt, please speak with your local Worrells partner. We’re here to help and can take you through the practical solutions available.

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