The ATO waves its debt collection sabers – How prepared are you and your customers?

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Contributed by Tax Controversy Partners Pty Ltd

After a COVID-induced hiatus, there has been much recent activity from the ATO on its debt collection efforts, including warnings about the potential issuance of Director Sanction Notices and dismissal larger tax liabilities to credit reference agencies, as can be seen from these links to public statements from the ATO:

• ATO prioritizing support and assistance for debt collection efforts

• Director’s Penalty Notice

The ATO has significant powers to deal with corporate tax debts that are not available to other corporate creditors, including:

  • Seizures – Section 260-5 of Schedule 1 of the Tax Administration Act 1953 gives the Commissioner power to collect unpaid tax debts by portion a garnishee over an entity that includes individuals, financial institutions and trade debtors. This is a statutory power and the Commissioner does not need third party or court approval. A garnishee may be issued if there are reasonable grounds to believe that the person:

(a) is an entity through which money is owed or due to the debtor; or (b) holds the money for or on behalf of the debtor; or (c) holds the money in the account of another entity for payment to the debtor; or (d) is authorized by another entity to pay the money to the debtor.

  • Garnishments of the total amount payable to a taxpayer can have a serious impact on business cash flow. This is therefore an area where prompt action must be taken to engage with the ATO. However, a person who fails to comply with a valid Notice of Seizure without lawful excuse commits an offense and may be subject to a fine of 20 penalty units (one penalty unit is $222 as of July 1, 2020) – thus any entity receiving such a garnishee would be wise to seek advice on whether they should comply or, if not, urgently seek redress from the courts.
  • Administrators Penalty Notice (DPN) – which can be issued against administrators for unpaid PAYGw, super warranty charges and/or GST. DPNs take two forms:

1. ‘Lockdown’ – when liabilities NOT declared AND remain unpaid for more than 3 months. Directors must arrange for DPN debts to be paid within 21 days or the debt can be collected from the Director(s).

2. “Unlocked” DPNs – where liabilities ARE reported, BUT have been outstanding for more than three months. Administrators must either pay, liquidate or restructure the small business within 21 days or the debt can be collected from the administrator(s).

There are limited defenses (illness/other ‘good’ cause or having taken ‘reasonable steps’) available against DPN liability – which must be raised within 60 days of the issuance of the DPN or recovery of the one of the DPN’s debts (many advisors miss this last point, so the ATO credit of repayments may be a particular trigger for raising DPN defenses). The case law isn’t too favorable to administrators raising such defenses – perhaps because the ATO can be receptive to these well-established defenses and cases like this don’t end up in court. Having seen a fair number of DPN cases where these defenses have not been raised in time or do not adequately meet the burden of proof, this is an area where counselors may want to seek assistance from experts.

  • Disclosure of material undisputed tax debts to credit reference agencies – which is a relatively new power that the ATO is actively using as a tool to encourage companies to arrange payment plans or face the prospect of such debts becoming known of their other creditors and financiers. [In a sense, this is a remedy already available to other creditors and financiers, but this puts the ATO in a new position of being able to make such disclosures without potentially breaching the taxpayer secrecy and confidentiality provisions.]
  • Potential legal action – under section 8Y of the Revenue Administration Act 1953, which reads:

“…a person…who is involved in or participates in the management of the company is deemed to have committed the tax offense and is punished accordingly.”

Accordingly, if a director (whether express or de facto) causes a corporation to commit a tax offense or offenses, he may also be liable for relevant fines and relief orders issued against that corporation.

  • The Crimes (Tax Offences) Act 1980 (Cth) creates criminal offenses for the fraudulent evasion of a range of taxes administered by the ATO. Section 21B of this Act makes a director convicted under Section 8Y personally liable for tax due to the ATO. (Similar issues may arise in parallel offenses under the Crimes Act.)

In addition to the “special powers” ​​of the ATO, there are a wide range of other general law issues that can affect the collection of tax debts, including:

  • Insolvent business risks (see s 588G of the Companies Act 2001) appear to be particularly prevalent where tax liabilities are involved. From experience, many cases where tax liabilities have increased cause the company concerned to be or quickly become insolvent, leaving the directors at risk.
  • False declarations of solvency for deregistered companies. For successful voluntary winding up (under section 494(1) of the Companies Act 2001):

1. the majority of the directors must declare that there has been an investigation into the financial affairs of the company, and

2. A meeting is held where the majority of directors agree that the company could pay its debt in full within the next 12 months.

  • Recovery of certain unfair preferential transactions (under the provisions of the Companies Act and/or the Bankruptcy Act). The ATO has a proven track record of compensating many liquidators to learn about potential preferential transactions to enable the “recovery” of potentially available funds/assets to help pay creditors (noting that the ATO is often largest unsecured creditor in most business failures).
  • Similarly, debts owed to a company that becomes insolvent by shareholders and/or their associates can have unintended consequences. Many Div 7A loans from previously profitable businesses (with distributable surpluses from previous tax years) can prove troublesome when that business goes through an insolvency event. If the liquidator pursues these debts (which are likely to be in default due to this insolvency), this may require these shareholders and/or partners to repay the full debt due or face personal legal action and to possible bankruptcy on their own. Again, this is a matter where such people may be surprised by such an unexpected prick in the tail, so care must be taken in managing the affairs of the company with prior knowledge of shareholder/partner risks .
  • Although often effective, discretionary trusts do not always provide complete protection against the insolvency of a data controller, so careful consideration should be given to the establishment of such trusts and the management of their affairs in time, especially during the few years preceding a possible insolvency. Otherwise, the “mere expectation” protection for a “mere discretionary purpose” of a discretionary trust may not provide the intended protection.

Overall, we note that the increased pace and scale of ATO activities will likely result in more work for tax agents and tax lawyers. We look forward to sharing ideas on the above questions and related topics in an upcoming webinar. We hope practitioners can join us for the discussion.

Bruce Collins, Founder and Lead Counsel at Tax Controversy Partners Pty Ltd, will host a webinar “The Risks of Director Sanction Notices and Corporate Insolvencies for Tax Debts” with CCH Learning on Thursday, June 23 at 10:30 a.m. Please join the discussion by registering here.


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