Many accountants will know a client whose business has struggled due to COVID-19 and they are unable to pay their tax bills and are in huge debt. How can clients be helped out of this situation?

 As you would be aware, the ATO has been focussing its attention on compliance as a result of thousands of business owners neglecting to lodge returns over the past 18 months.

Legislation was recently enabled to allow the ATO to disclose to credit reporting bureaus (CRBs) the details of taxpayers who have:

• ATO debts of greater than $100,000 that are over 90 days overdue, and
• failed to actively engage with the ATO regarding the repayment of these debts.

When considering this $100,000 threshold, the ATO will include:

• income tax debts
• activity statement debts, for example, GST, PAYGW
• superannuation debts
• fringe benefits tax debts, and
• penalties and interest charges.

What happens if your client has significant ATO debt and can’t afford to pay up?

Where the ATO has selected a business that meets the disclosure criteria, an orange-coloured warning letter will be issued. A further 28-day grace period is allowed before CRBs will be notified, which we expect may have a terminal effect on that business’s cashflow once general trade creditors become aware.

For those businesses with debts of more than $100,000 that wish to have the ATO compromise its debt and enter into a repayment program, they will need to speak with an ATO officer because an automatic repayment program payment option is not available. The ATO is unable to compromise any primary tax debts due; flexibility only exists regarding penalties and interest in the absence of a formal insolvency appointment. The ATO will also likely require that all tax lodgements are up to date.

If a repayment program cannot be obtained or the necessary lodgements are not done, then those directors may find themselves on the receiving end of a director penalty notice (DPN). A DPN is a formal notice issued by the ATO upon directors of a company to hold them personally liable for specified tax liabilities of their company.

It’s important to note that as the debt becomes a personal liability of its director, if the debt is not paid it can result in the bankruptcy of the director. Non-payment of taxes is just one sign of an underperforming business.

What should accountants do to help clients who find themselves in significant ATO debt?

If you have a client who has: tax debts; deferred debts (eg landlord exposure); received a DPN; and /or wishes to ‘right size’ its debt profile to suit its current cashflow, you should consider specialist insolvency advice.

Some of the warning signs of insolvency are:

• making a loss over a sustained period
• increasing bad debt
• threats of legal action from creditors
• increased use of new suppliers, and
• high staff turnover.

Given the impact of the pandemic, we expect that many clients will have debt deferment arrangements in place (particularly with landlords), which will result in net asset deficiencies within their balance sheets. These need to be addressed. For some, the option of entering into a small business restructure (SBR) process can appear attractive, and insolvency experts can work with you to assess your client’s eligibility to enter into a SBR and the levers able to be used to save it, such as: director capabilities, sources of funding, cost out programs and revenue enhancement opportunities.

If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.