The Australian Tax Office (ATO) has increased its use of firmer debt collection actions, such as issuing director penalty notices (DPNs) and disclosing business tax debts. While some actions are still below pre-COVID levels, taxpayers who do not pay on time and in full may face formal legal recovery action by the ATO if they do not engage with the agency. McGrathNicol partner Kathy Sozou warns that a DPN can have unintended consequences, as it can be issued to current and former directors if a company fails to pay its debt and does not make other arrangements with the ATO. Sozou notes that the rate of DPNs being issued reached around 30 to 40 a day earlier this year.
Sozou emphasizes the importance of company directors speaking to their accountants regularly to assess the viability of their business. She highlights a common perception among directors that the ATO can be viewed as a lender of last resort to help with other business payments, leading to delays in paying taxes. However, Sozou cautions that strict ATO enforcement can have serious flow-on effects, citing a case where a high-end joinery business in Sydney with 80 employees and a $20 million turnover was wound up by the court and liquidators appointed following ATO action, including a DPN against the director.
While Sozou acknowledges that DPNs are a blunt instrument that hold directors accountable for their duties, she also notes that they can sometimes make a tough situation worse by limiting the ability to find non-terminal solutions. Despite the ATO’s efforts to enforce payment and hold directors accountable, Sozou believes that these actions may not always achieve the desired outcomes. The ATO’s increased use of firmer debt collection actions has sparked debate over their effectiveness and potential negative repercussions on businesses facing financial distress. Sozou’s insights shed light on the challenges and complexities that arise from the ATO’s enforcement measures and the impact they have on directors and their businesses.
Overall, the ATO’s aggressive approach to debt collection, including the issuance of DPNs and disclosure of tax debts, reflects a broader effort to enforce compliance and combat tax evasion. While these measures are intended to ensure timely payment and hold directors accountable for their tax obligations, they have raised concerns about unintended consequences and potential negative effects on struggling businesses. Sozou’s experiences at McGrathNicol highlight the complexities and challenges faced by companies dealing with financial distress and the role of the ATO in managing these situations. As businesses navigate the economic challenges brought on by the COVID-19 pandemic, finding a balance between enforcement actions and supportive measures remains a key priority for stakeholders in the business and tax community.
