Business Finance 101 – ATO focus on debt collection – how to manage financial stress

During the pandemic, the ATO intentionally shifted its focus away from stronger debt collection action to help and assist businesses and the community experiencing financial challenges because of the pandemic. The ATO took a delicate approach, acknowledging the extent of financial hardship that the pandemic had caused business and individuals.

ATO debt collection has now resumed with communication and collection processes.

The Importance of engaging with the ATO

The ATO understand that a lot of people – especially small businesses – have done it tough through COVID and may now have a significant tax debt. The message to business is – don’t stick your head in the sand – even if you can’t pay the full amount owed straight away, engage a Professional Bookkeeper and a Tax Professional and work with them to set up an appropriate payment arrangement.

A “wait-and-see approach” simply won’t pay off and continued deferrals will only encourage complacency and future stress within business operations and cash flow. A wait-and-see approach to compliance can set up a business for a lifetime struggle to stay afloat. Additionally, adopting this approach, the pace of recovery will be very slow.

The ATO cannot help taxpayers who do not engage with them. We will see a lot more activity from the ATO in the coming months as a focus is put on businesses that fail to report. If a business is continuing to fail on reporting obligations or has a pattern of consistent late or non-lodgement, negotiation with the ATO becomes more difficult. Taxpayers engaging in unscheduled voluntary or sporadic payments is not acceptable to the ATO. The ATO’s preferred approach is always to work with taxpayers to resolve their situation through engagement rather than enforcement.

However where taxpayers don’t engage, the ATO is taking firmer action. This includes garnishees, recovery of director penalties, disclosure of business tax debts, and legal actions including summons, creditors petition, wind-up and insolvency action. These actions are only taken when the taxpayer refuses to engage with the ATO.

Stronger Action - The ATO are expecting a lot of payment plans to really try to get businesses gradually back fully into the system. They are committed to supporting taxpayers who want to do the right thing and preventing those who don’t pay from gaining an unfair financial advantage. They will use stronger action when people:

• Are unwilling to work with the ATO;
• Repeatedly default on agreed payment plans;
• Don’t have the capacity to pay and don’t take steps to resolve their situation;
• Have been subject to an audit where we detect deliberate avoidance and payment avoidance continues;
• Appear to be engaging in phoenix activities (using liquidation to avoid financial obligations without risking assets and with the intention of resuming business operations through a new entity).

Stronger action includes:

• Garnishee notice;
• Director penalty notice;
• Direction to pay Super Guarantee Charge (SGC);
• Disclosure of business tax debts;
• In some cases the ATO may take legal action to recover outstanding tax and super debts. The action they take depends on whether an individual (or sole trader), partnership, trust, superannuation fund or company owes the debt and may include Claim or summons.

See ATO – If you don’t pay

Take action – be proactive to get on track

Clearly now is the time for proactive solutions.

You will need a good understanding of the business and its cash flow so you know what the business can pay. It is important be across the business’s capability to pay debts.

Regularly look at expenses and go over what is the most important debt for a business to pay. Get ahead of any issues and be encouraged to work with the ATO. Reminder - it is always important to lodge and then the issues can be discussed with the ATO.

It’s important to lodge on time, even if you can’t pay. Lodging on time will give a business certainty of its financial position, which means a greater understanding of what the business needs to do, when to ask for help, and the support options available to them.

It’s never too late to ask for help. The earlier contact is made with the ATO, the more options are accessible. It is essential to assist in freeing the business of core debt and helping to get the business into a position of compliance.

Mitigate issues with clearly communicated payment plans and cash flow organisation.

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