'Aggressive': The ATO Prioritises Directors for Tax Debts

The number of businesses in a tax-debt crisis has risen, and the ATO has shifted its strategy to target directors directly.

The average tax debt has risen sharply in just a year, and the ATO has become more active — using director penalty notices (DPNs) not just as a last resort. A significant number of DPNs are being issued, and where a company is non-compliant, recovery action against directors is following swiftly.

DPNs are frequently dispatched even before statutory demands, and once a company falls into non-compliance, recovery action against the director is almost standard procedure. Although not required, the ATO had previously sent warning letters. Now, even if a company had a compliant payment arrangement, defaulting on that arrangement — such as failing to fully pay upcoming or ongoing liabilities — results in the company automatically being considered in default. Once that happens, even if the company continues to make voluntary payments, DPNs are being issued against directors.

Companies assisting with ATO payment-plan negotiations have reported a threefold increase in clients compared with a year earlier, highlighting the stress being felt across the business community. Debts of at least six figures are not uncommon, with many businesses carrying debts well above pre-COVID levels — on average, company debt levels have roughly doubled compared with before the pandemic.

For those who didn't make payments during the pandemic, debt levels have risen, and the ATO is now demanding full payment and immediate compliance. Businesses are under significant pressure, effectively starting from a disadvantaged position and needing to catch up while already in a state of non-compliance.

It's important for companies to focus on PAYG, GST and super liabilities, and to stay current with lodgments — clients are being hurt by deadlines that have been overlooked. In many cases a late lodgment, or a missed payment on an ongoing liability, leads to default of the arrangement. Despite continued voluntary payments, some directors have been taken completely by surprise by a direct penalty notice, unaware they were even in default.

On receiving a DPN, immediate action becomes necessary for the director, and the timeframes for negotiated plans are becoming more stringent as the ATO adopts a firmer stance. Consistent defaults within an arrangement, late lodgments, and a failure to reduce a growing debt all contribute to non-compliance.

Where a company can demonstrate that it is a viable business, performing well and needing an affordable payment arrangement with sufficient time to repay, outcomes are far more positive. Companies dealing with multiple creditors — not just the ATO — tend to face the greatest challenges. Ultimately, being in a compliant arrangement is the surest way to avoid further legal recovery action. If you're worried about a tax debt or a DPN, talk to us early.