ATO targets company directors with penalty notices to recoup $5bn in tax owed

The ATO has ramped up debt recovery, focusing on company directors using it as a ‘low-interest loan facility’, as it seeks to collect billions of dollars accrued during the pandemic.

The Australian Taxation Office has ramped up debt recovery, focusing on company directors using the ATO as a “low-interest loan facility”, as it seeks to collect billions of dollars accrued during the Covid pandemic.

ATO deputy commissioner, lodge and pay, Vivek Chaudhary told the recent Tax Institute 2023 Tax Summit that rising debts owed by companies and individuals were “concerning, and unsustainable”, with small business the main culprit.

Fuelled by the pandemic, the amount of tax owed to the ATO has risen by 89 per cent over the past four years to $50.2bn in June 2023, with business making up 90 per cent of that figure.

Of the $45bn of collectable debt owed by all businesses, small businesses continues to be over-represented, owing more than $33bn.

Mr Chaudhary said there remained more than $5bn owed by companies that met the criteria for the delivery of director penalty notices (DPN).

“All signs point to this amount continuing to increase,” he said.

“It’s not fair for businesses with large outstanding debts to continue to use the ATO as a low-interest loan facility and it’s clear that disclosing business tax debts provides strong incentives for engagement with the ATO regarding these debts.”

If a company’s tax debt involves staff PAYG deductions, superannuation or GST, then the ATO can make those amounts the director’s personal debt. Another avenue open for the ATO is naming and shaming directors through the disclosure of business tax debt to registered credit reporting bureaus.

Mr Chaudhary said the use of DPNs and the opportunity to disclose business tax debts had already shifted the business landscape in relation to ATO debt recovery. There were 23,246 DPNs issued in 2022-23, compared to 18,500 for the 2022 calendar year. Sixty DPNs were being issued each day on average, compared to 30 in May 2022. Overall 2500 businesses are expected to be reported to credit agencies in the current financial year, up from 867 last calendar year.

Last year the ATO issued warning letters. This year, the serious recovery notices are the warning letters and DPNs and statutory demands that give company directors just 21 days to pay their debt or voluntarily enter an insolvency appointment. According to the Australian Securities & Investments Commission, in the 12 months to June 20, 2023, 7942 companies entered an insolvency appointment, up 62 per cent from 4912 the year before.

Revive Financial’s Jarvis Archer.

Revive Financial head of business restructuring & insolvency Jarvis Archer said the ATO’s tougher stance had driven a surge of inquiries to insolvency firms.

“On a scale of one to 10, the ATO’s current level of aggressiveness would be at least an eight,” he said.

Mr Archer said most of the small business debts stemmed from the pandemic because of lockdowns and restrictions impacting staff, suppliers and ­customers.

“The ATO actively told business owners not to pay during 2020 and 2021, and many didn’t hear from the ATO until late 2022,” he said. “I think many business owners still feel lost. They walked out of Covid and into a cost-of-living crisis, where sales dropped, costs have risen and staff aren’t available.

“Instead of seeing the apparent recovery, trading conditions are the worst they’ve been for some sectors. So while affected business owners feel entitled to ongoing support as trading conditions haven’t really improved, the ATO is in a very different headspace.”

Mr Archer said the number of DPNs in 2023-24 will easily exceed the previous financial year, particularly with 500,000 lodgements expected under the late lodgement amnesty.

Mr Chaudhary said that in general corporate insolvency action was initiated by commercial entities, with only one in six insolvencies sparked by the ATO.

“We don’t make the decision to commence wind-up proceedings lightly, and this is only after the company has been afforded ample opportunity to re-engage and address its debts,” he said.

“But we will go down this path if we need to.

“We intend to continue increasing legal recovery actions this year to return to more normal pre-pandemic levels, with approximately 100 wind-ups filed in July 2023 alone,” he said.