Small business owners with a business tax debt are encouraged to work with the Australian Taxation Office (ATO) to help manage it through a mutually acceptable plan.
Dealing with financial stress while running a business can be difficult, and a tax debt notification from the ATO can be something you’d prefer to ignore.
While it is often tempting to brush it aside and deal with it at a later stage, or panic and try to resolve your debt through a short-term solution, there are a variety of tailored resources available to help you manage your tax debt without resorting to extreme measures and avoid making your situation worse.
What has changed about ATO debt collection?
After suspending many debt collection activities during the COVID-19 pandemic, the Australian Taxation Office (ATO) is now actively pursuing the recovery of outstanding tax liabilities, including small business tax debts.
Recently, the ATO has been utilising various mechanisms to recover debts, including issuing notices of Intent to Disclose Business Debts and Director Penalty Notices (DPNs).
It is important for small businesses to engage with the ATO upon receiving a notice. Ignoring communications will only worsen the situation of small business owners in debt.
What is a Director Penalty Notice?
If you are a company director, you are responsible for ensuring you report and a number of business obligations on time. You are also personally liable for the following ones:
- Pay as you go withholding (PAYGW)
- Goods and services tax
- Super guarantee charge (SGC).
If these are not paid by the due date, you become personally liable for the unpaid amounts, also called Director Penalties. In such situations, the ATO can send company directors a Director Penalty Notice (DPN) to recover the company's unpaid amounts. Once the ATO issues a DPN (the day it is posted), company Directors have 21 days to either:
- pay the penalty amounts in full, or
- engage with the ATO and negotiate a payment plan for the company debt.
How will the ATO recover unpaid debts?
If unpaid debts are not cleared, the ATO can recover the amounts of the Director Penalty by:
- issuing garnishee notices (notices to the company Director’s financial institution, trade debtors or suppliers of merchant card facilities to request payment of the debt directly to the ATO)
- offsetting any of the company Director’s tax credits against the Director Penalties, or
- initiating legal recovery proceedings.
What is a Disclosure of Business Tax Debts program?
As part of the Disclosure of Business Tax Debts program, the ATO has written to taxpayers that meet the criteria to have their tax debts disclosed to credit reporting bureaus (CRBs). The ATO has identified small businesses including sole traders with large outstanding debts as part of this process.
When debts are disclosed to CRBs, they will become visible on credit rating checks which can impact small businesses’ ability to receive finance as well as supplier relationships.
The aim of the Disclosure of Business Tax Debts program is to address the unfair advantage gained by businesses who are not meeting their tax payment obligations. If you receive a letter and do not engage with the ATO to manage your debt, you may receive another letter telling you that your debt has been disclosed to CRBs.
It is important to work with the ATO and negotiate a mutually acceptable plan to avoid your debt information being disclosed. Your tax debt may be disclosed if you meet all the following criteria:
- you have an Australian Business Number (ABN)
- you have one or more tax debts and at least $100,000 is overdue by more than 90 days
- you are not engaging with the ATO to manage your tax debt
- you don’t have an active complaint lodged with the Inspector-General of Taxation about the ATO’s intent to report its tax debt information.
It’s important to note that the ATO will only report business tax debt information to CRBs that are registered with the ATO and have signed a Deed of Agreement, agreeing to ATO standards and requirements regarding the recording, removal and use of tax debt information.
Tax debt information is removed from a CRB’s credit report when the business no longer meets the criteria for disclosure, for example when they pay their debt in full or are adhering to a payment plan.
What you need to know
If you find yourself in a situation where you are struggling to repay your debts, you are encouraged to reach out to the ATO as soon as possible for help and assistance in meeting your tax obligations.
Although we don’t provide taxation advice, the SBDC’s free business advisory service is available to help develop next steps for you to manage business debt, or to connect you with someone who can best understand your situation.
Help is always available
The ATO wants to help you manage your debt effectively in a way that allows you to continue operating your business. They encourage you to contact your tax adviser and bring all your lodgements up to date so you have a full picture of your tax position. If you cannot pay in full, they will encourage you to start paying back your debt by setting up a setting up a payment plan.
If your business is struggling with debt, there are free financial counselling services small businesses can seek assistance from.
These counsellors provide independent advice and support, helping with tasks like negotiating payment arrangements with creditors, understanding bankruptcy options, and organising financial records.
They can also offer guidance on developing financial management strategies to navigate short-term difficulties and ensure long-term viability.
Are there exceptions?
If you find yourself in exceptional circumstances such as a family tragedy, a serious illness or you are impacted by a natural disaster, your case will be assessed on an individual basis to find the best solution for you. More information can be found on the ATO website.
The ATO’s message to small business owners is not to stick your head in the sand, and even if you are unable pay the debt immediately, contact the ATO or your registered tax professional for help setting up appropriate payment arrangements.
More information
- Director penalties (ATO)
- Disclosure of business tax debt (ATO)
- Help for businesses in financial distress
- Financial planning documents
- Choosing an accountant
- Free business tools including our cash flow forecast calculator and breakeven analysis calculator
