ATO targets directors over $2.5 billion in unpaid super, GST, employee income tax

The Tax Office is ramping up action against company directors as it chases $2.5 billion in unpaid taxes from businesses that have failed to pay superannuation, pass on GST or pass on income tax of employees.

Directors who have amassed large assets, such as trophy homes and flash boats, while not passing on collected taxes to the Australian government are some of the first in the firing line, according to sources familiar with the Australian Taxation Office’s operations.

Luxury boats are among the assets in the ATO’s sights as it ramps up its collection activities against directors who have failed to pay millions in business taxes while living the high life. Credit: Glenn Hunt

Over the past eight months, the ATO has issued 18,334 director penalty notices (DPNs) – a 320 per cent increase on the 4362 DPNs issued in the 2021-22 financial year. The increase in the numbers is mostly due to the lifting of a grace period the ATO put in place during the pandemic when it sharply reduced its enforcement activities.

DPNs are a government instrument that make directors personally liable for a company’s tax debts. If ignored, the notices can lead to serious outcomes for directors, including the seizure of assets, bankruptcy or the garnishing of wages by the ATO.

In some cases, a director can fend off a notice if they can show they had not been involved in managing the business, had made every effort to ensure the business was keeping up with its tax issues, or if the business was in administration or had started the process of winding down.

Directors who don’t do this and allow their business to trade and ignore the notice will receive a “lockdown DPN”. The ATO has a stated policy of not compromising on lockdown DPNs, and there is no legislative basis to waive such debts.

A spokesperson for the ATO said it had returned to “business as usual” debt recovery operations since its pandemic grace period finished.

“We have increased our use of firmer debt collection actions, including director penalty notices and disclosure of business tax debts, although some actions still remain below pre-COVID levels,” the spokesperson said.

“Taxpayers who do not pay on time and in full may be subject to formal legal recovery action by the ATO where they do not engage with us.

“If a company doesn’t pay their debt and doesn’t contact the ATO to make other arrangements, a DPN may be issued to each current director, as well as anyone who was a director at the time the company failed to pay.”

McGrathNicol partner Kathy Sozou says a DPN can have unintended consequences.

At the coalface of business distress, Kathy Sozou, a partner at restructuring advisory group McGrathNicol and vice president of the peak body for insolvency practitioners, said the rate of DPNs being issued hit about 30 to 40 a day earlier this year.

Sozou said company directors needed to speak to their accountants more frequently to get advice on the viability of their business.

“Too often, the ATO is treated by directors as a lender of last resort to allow directors to meet other business payments such as staff costs, suppliers, rent, services,” Sozou said. “There is this perception you don’t need to immediately pay the Tax Office.”

On the other side of the coin, Sozou said, strict ATO enforcement could have serious flow-on effects.

Sozou recently worked on a case in which a high-end joinery business in Sydney with 80 employees and a turnover of $20 million a year was wound up by the court and liquidators appointed following action by the ATO, which included a DPN against the director.

“It is a very blunt instrument, but it is holding people to account for the duty they have signed up for in agreeing to be a director,” Sozou said.

“The converse to that is that it may well be making a tough situation worse in some respects – we’re giving people less ability to find solutions that aren’t terminal.

“It’s almost having a negative effect, or at least not necessarily always achieving what the ATO wants to achieve.”

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