Contributed by Tax Controversy Partners Pty Ltd

After a COVID-induced hiatus, there has been a lot of recent activity from the ATO on their debt collection efforts, including warnings about the potential issue of Director Penalty Notices and referral of larger corporate tax debts to credit reference agencies, as may be seen from these links to public statements from the ATO:

• ATO prioritising support and assistance for debt collection efforts

• Director penalty notices

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

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

(a) is an entity by whom the money is due or accruing to the debtor; or (b) holds the money for or on account of the debtor; or (c) holds the money on account of some other entity for payment to the debtor; or (d) has authority from some other entity to pay the money to the debtor.

  • Garnishees for the whole amount to be paid to a taxpayer can trigger severe cashflow impacts for businesses, so this is an area where prompt action needs to be taken to engage with the ATO. However, a person who does not comply with a valid garnishee notice without a lawful excuse commits an offence and may be liable for a penalty of 20 penalty units (a penalty unit is $222 from 1 July 2020) – so any entity receiving such a garnishee would be wise to seek advice about whether they should comply or, if not, urgently seek relief from the courts.
  • Director Penalty Notices (DPNs) – which may be issued against directors for unpaid PAYGw, Super Guarantee Charges and/or GST. DPNs take two forms:

1. ‘Lockdown’ - where liabilities NOT reported AND remiain outstanding for more than 3 months. Directors must arrange for the DPN debts to be paid within 21 days or the debt may be recovered from the director/s.

2. ‘non-Lockdown’ DPNs - where liabilities ARE reported, BUT are outstanding for more than three months. Directors must either pay, liquidate or small business restructure within 21 days or the debt may be recovered from the director/s.

There are limited defences (illness/other ‘good’ reason or having taken ‘reasonable steps’) available against DPN liability – which must be raised within 60 days of the issue of the DPN or of the recovery of any of the DPN debt (many advisors miss that last point, so ATO crediting of refunds can be a particular trigger for raising DPN defences). The case law isn’t overly supportive of directors raising such defences – perhaps because the ATO may be receptive to those defences that are well made out and cases like that don’t end in court. Having seen a fair number of DPN cases where those defences haven’t been raised in time or not appropriately meeting the onus of proof, this is an area where advisors may want to obtain expert assistance.

  • Disclosure of undisputed large 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 those debts becoming known to 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 prosecution action – under section 8Y of the Taxation Administration Act 1953, which reads:  

“… a person… who is concerned in, or takes part in, the management of the corporation shall be deemed to have committed the taxation offence and is punishable accordingly.”

As a result, if a director (express or de facto) causes a company to commit a taxation offence or offences, then they can also be made liable for the relevant fines and relevant reparation orders made against that company.

  • The Crimes (Taxation Offences) Act 1980 (Cth) creates criminal offences for fraudulently evading a range of taxes administered by the ATO. Section 21B of that Act makes a director convicted under s 8Y personally liable for the tax owed to the ATO. (Similar issues can arise under the parallel Crimes Act offences.)

Aside from 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 trading risks (see s 588G of the Corporations Act 2001) seem to be especially prevalent when tax debts are involved. From experience, many cases where tax debts have been growing result in the relevant company is or quickly becomes insolvent, leaving directors at risk.
  • False declarations of solvency for deregistered companies. For a successful voluntary winding up (under s 494(1) of the Corporations Act 2001):

1. a majority of directors must make a declaration that there has been an inquiry of the company’s financial affairs, and

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

  • Claw-back’ of certain unfair preference transactions (under either/both Corporations Act and/or Bankruptcy Act provisions). The ATO has a proven track record of indemnifying many liquidators to make enquiries about potential preference transactions to allow the ‘clawing-back’ of funds/assets to potentially become available to help pay creditors (noting that the ATO is often the largest unsecured creditor in most business insolvencies).
  • 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 companies (with distributable surpluses from earlier tax years) can prove troublesome when that company strikes an insolvency event. If the liquidator pursues such debts (which are likely to be in default due to that insolvency), then this can leave those shareholders and/or associates having to repay the full debt owed or face personal legal action and possible bankruptcy in their own right. Again, this is a matter where may such people are surprised by such an unexpected sting in the tail, so care needs to be taken in managing the company’s affairs with foreknowledge of the shareholders’/associates’ risks.
  • While often effective, discretionary trusts are not always a complete protection in the insolvency of a controller, so special care needs to be taken in establishing such trusts and in managing their affairs over time – especially for the several years before a potential insolvency may arise. Otherwise, the shield of ‘mere expectancy’ for a ‘mere discretionary object’ of a discretionary trust may not provide the intended protection.

Overall, we note that the ATO’s increased pace and scale of activity is likely to lead to more work for tax agents and tax lawyers. We are looking forward to sharing insights on the above issues and related topics at a forthcoming webinar. We hope that practitioners can join us for the discussion.

Bruce Collins, Founder and Principal Solicitor at Tax Controversy Partners Pty Ltd will be running a webinar “The Risks of Director Penalty Notices and Corporate Insolvencies for Tax Debts” with CCH Learning on Thursday 23 June at 10.30am. Please join the discussion by registering here.