AUSTRALIAN TAXATION OFFICE – RECOVERY PROCEDURES

The Australian Taxation Office, as with any other creditor, has a number of avenues available for the purpose of recovering debts owed. However, as any action that is to be taken needs to be assessed as to its appropriateness to the circumstances of the debtor. Some of the factors that the ATO tends to consider are as follows:

  1. The asset position of the debtor. If a debtor does not have sufficient assets to meets its current debts then it may not be appropriate to commence liquidation proceedings as the ATO will not likely recover its debt in full. Alternatively, the ATO may decide to enter into a payment arrangement that sees its debt paid in full over a period of time.
  1. The creditor position of the debtor. If the ATO is not the only creditor of a company it may not be appropriate for the ATO to enter into a long term payment arrangement as winding up proceedings could be commenced by another creditor which could see payments to the ATO recouped by way of preference payment recoveries.
  1. Examination of the debtor’s affairs. In circumstances where a debtor does not appear to have any recoverable assets a return may still be available in a liquidation by investigating the debtor. Examinations into the actions of the debtor may identify uncommercial transactions, such as assets disposed of for less than fair value or purchased at more than fair value, which could be pursued to for the purpose of adding to the pool of funds available to creditors.
  1. Nature of the debt owed. It may be appropriate for the ATO to act quickly so as to avoid its debt growing. By the ATO commencing liquidation proceedings it may limit a debt to its current amount that may be expected to grow significantly in the future.
  1. Future income of the debtor. If it is evidenced that a debtor’s financial position is likely to improve in the future then it may be more beneficial to the ATO to accept a payment arrangement over time that allows for the continued payment of its debt owed.
  1. Behaviour of the debtor. The ATO is wary of the actions of debtors who are seen to be experiencing financial difficulties. A debtor may take measures to limit its ability to pay its creditors, in such a situation these creditors may need to take action to protect its own interests with its priority being the payment of its debt owed.
  1. The cost versus return of liquidation proceedings. The process of commencing liquidation proceedings requires legal expenses and filing fees to be incurred by a petitioning creditor. The ATO will need to consider whether incurring expenses in winding up a company will be fruitful by way of a dividend return. In essence the ATO needs to assess the commerciality of commencing proceedings to wind up a company.
  1. The composition of the debt owed to the ATO. A Director is faced with personal liability where a Director Penalty Notice (“DPN”) has been issued for withholding tax. The ATO may use a DPN in which to coerce a Director to enter into voluntary administration or voluntary liquidation, without having to take measures in commencing winding up proceedings themselves.
  1. Cease of trade or Struck-off. The ATO may consider whether the company has ceased to trade or has been struck off by the ASIC.
  1. Public interest factors. Actions associated with fraudulent activities of officeholders as well as criminal activity will also be considered in isolation. Commencing action will likely put a stop to fraudulent or criminal activities and may be seen to be a measure for the greater good.

The path that the ATO normally follows in pursuing its debts is as follows:

  1. Communication – The ATO will attempt to contact you in order to discuss the repayment of your outstanding debt. They may contact you by way of telephone, letter, through a debt collection agency, or other methods available to them.
  1. Garnishee Notice – a garnishee notice may be issued to an individual or entity that holds money on your behalf, usually your financial institution. This requires that the party remit an amount of money, be it a percentage of the money held or a lump sum payment, to the ATO
  1. Director Penalty Notice – a director is personally liable for PAYG Withholding and Superannuation Guarantee Charge liability where a company fails to meet these debts by their due date, or fails to comply with associated reporting obligations. Should the debt remain outstanding then the ATO may issue a DPN in order to commence legal proceedings. The penalty is remitted whereby a Company enters into Voluntary Administration or Liquidation within twenty-one (21) days after the issuing of the DPN, and the PAYG and SGC liabilities are reported to the ATO within three (3) months of their due date.
  1. Statutory Demand – a statutory demand may be issued where a tax debt remains unpaid and requires a payment arrangement or the debt to be paid in full within twenty-one (21) days. Upon the expiry of a statutory demand the ATO may commence proceedings in the Federal Court to have the company wound up. However, it is noted that these proceedings must be commenced within three (3) months of the compliance date specified in the demand.
  1. Wind-up Proceedings – the ATO will seek an order of the Federal Court to have the Company placed into Official Liquidation.

Director Penalty Notices

The ATO’s policy objective of the Director Penalty regime is to ensure that directors cause their company to meet certain tax obligations. Under relevant legislation, companies have an obligation to withhold certain amounts from the wages of employees and pay those withheld amounts to the ATO. These obligations exist under the Pay As You Go (“PAYG”) withholding regime. In addition to these obligations, companies are also required to pay a Superannuation Guarantee Charge (“SGC”) under the Superannuation Guarantee (Administration) Act 1992 (SGA Act 1992).

The Director Penalty regime makes directors of companies that fail to meet PAYG withholding or SGC liabilities by the due date,to automatically become personally liable for a penalty equal to the unpaid amount.

For the purpose of the Director Penalty regime, a company’s PAYG withholding and SGCliabilities should be treated as payable on the day the employer is required to lodge their PAYG withholding payment summary statement or their SGC statement with the ATO. This is either the lodgement due date (generally 1 month and 28 days after the end of a quarter), or a later day as allowed by the Commissioner. Where a company fails to pay such amounts, the Director Penalty regime makes the director liable to a penalty at the end of the day the company is due to meet its obligation.

While a Director Penalty is automatically imposed, the Commissioner must follow a specific procedure before being entitled to commence proceedings to recover that debt.The notice is in the form of a Director Penalty Notice (“DPN”). This does not prevent the Commissioner from taking other recovery actions, such as issuing garnishee notices on a company’s bank account. The Commissioner can only commence proceedings to recover a director penalty until 21 days after a DPN is issued to a director.

The notice is ‘given’ on the day when it is posted, and is sent to a director’s address as listed in the company records maintained by the ASIC. Directors should ensure their address details are correct with ASIC, or potentially they could be validly served with a DPN at an old address.

In addition to issuing a DPN on the director, the ATO may also send a copy of the DPN to a director’s registered tax agent. This is said to provide the ATO with an additional means of bringing the penalty to the director’s attention, however failure to do so does not affect whether the ATO has given the director actual notice.

Estimates and Director Penalty Notices

A DPN can be issued for an estimate of PAYG withholding or SGC liabilities. A director may submit a statutory declaration or affidavit to verify the amount of the underlying liability in relation to an estimate.  The effect may be that the estimate is reduced or revoked.

Remission of Director Penalties

The penalty will be remitted if a company pays its outstanding amount at any time.

It will also be remitted if, at any time on or before the 21st day after a DPN is ‘given’:

  • The company has gone into voluntary administration or liquidation, and
  • The company had reported its PAYG withholding and SGC liabilities within 3 months of their due dates.The Director Penalty will not be remitted by appointing an administrator or a liquidator where the company has failed to report its PAYG withholding or SGC liabilities within 3 months of the lodgement day. This creates, in effect, a “lockdown” on director penalties where the liability is not reported within 3 months of the due date for lodgement. This is aimed to encourage directors to at least report the company’s obligations within 3 months of the due date, in which case they will still be afforded an opportunity to extinguish their personal liability by placing the company into administration or liquidation.

In the past there was no restriction on remission options relating to PAYG withholding liabilities. This changed on 30 June 2012, when the option for remission on the basis of voluntary administration or liquidation was removed for penalties relating to company liabilities that had not been reported within 3 months of their becoming due.

The amendments impose a lockdown on a director for liabilities which remain unpaid and unreported by the company 3 months after the due day for lodgement. While it applies to PAYG liabilities that arise after the commencement of the new legislation on 30 June 2012, it also applies to director liabilities that were in existence before the new legislation commenced (if those liabilities were not extinguished). For SGC, it applies to liabilities that arise after 30 June 2012.

New Directors

Newly appointed directors have 30 days before they become liable to penalties equal to:

  • all their company’s outstanding PAYG withholding liabilities, and
  • any outstanding SGC liabilities that arose after 30 June 2012.
  • As a new director, he/she will not be liable to a Director Penalty if, within the 30 days, the company:
  • pays the amount outstanding,
  • goes into voluntary administration, or
  • goes into liquidation.

Defences

A director will not be liable for a Director Penalty if one of the defences under the relevant legislation is available to him/her, namely that:

  • Because of illness or for some other good reason, the director did not take part (and it would have been unreasonable to expect the director to take part) in the management of the company. The Commissioner may also excuse a director in circumstances where an ill spouse or child may need to be cared for.
  • The director took all reasonable steps to ensure that one of the following 3 things happened:

o        The company paid the amount outstanding,

o        An administrator was appointed to the company, and

o        The directors began winding up the company.

  • None of the aforementioned reasonable steps were available to you.

It is not sufficient for the director to state that no reasonable steps were available to cause one of the above 3 things to happen. For example, it is not sufficient for a director to say that there were no reasonable steps available to cause the company to pay because the company had insufficient funds.

Likewise, it will not be sufficient to state there was no consensus to pass a resolution for the appointment of an administrator. In this circumstance the director could have paid the liability personally and then exercised their right of indemnity and contribution against the company and/or the other directors.
The defence only succeeds if there were no reasonable steps available.

  • In the case of unpaid SGC liabilities, the company treated the Superannuation Guarantee (Administration) Act 1992 as applying in a way that could be reasonably argued was in accordance with the law, and took reasonable care in applying that Act.

This recognises that there can be some uncertainty about SGC liabilities, especially about whether particular workers are employees and therefore entitled to superannuation. There is no corresponding defence in relation to PAYG withholding obligations.

The provisions allow for a 60 day period to raise a defence against the recovery of all director penalties by methods other than court proceedings (such as collecting amounts from third parties), regardless of the character of the underlying liability (i.e. PAYG withholding or SGC). The 60 day time frame provides certainty for directors, employees, and the ATO in dealing with recovery of the SGC.

PAYG Withholding Non-Compliance Tax

The PAYG withholding non-compliance tax is imposed upon directors and associates of directors under the Pay As You Go Withholding Non Compliance Tax Act 2012. The circumstances that must exist before the liability to the PAYG withholding non-compliance tax arises are different for directors and associates.

Although the tax is due and payable, the tax is not recoverable unless the Commissioner issues a notice to the individual director or associate. The Commissioner should only issue a notice after determining that it is fair and reasonable for the individual to pay the tax.

The Commissioner cannot issue a notice where the relevant director has Director Penalty liability because of the company’s failure to pay PAYG withholding for the income year. To be liable, the director must also have an entitlement to a PAYG withholding credit that is attributable to an extent to an amount withheld by the company from payments made by the company to the director (such as director’s fees).

The liability to pay the PAYG withholding non-compliance tax arises for individuals that either:

  • were a director when the company was due to pay the withheld amounts to the Commissioner but failed to do so (in full); or
  • became a director after the payment of withheld amounts to the Commissioner was due (and not paid) and 30 days after they started as a director, they are still a director and the overdue withholding amount is still unpaid.

The amount of tax payable by the director is the lesser of:

  • the total amounts withheld from payments made to the individual by the company in the individual’s income year (that is, the extent that the credit is attributable to amounts withheld from payments made by the company of which the individual was a director); or
  • the company’s PAYG withholding liabilities for payments made during the income year.

The same defences for director penalties are available to be relied upon for the PAYG withholding non-compliance tax.

An individual who is an associate of a company director can be liable to pay PAYG withholding non-compliance tax for an income year if amounts withheld by the company (of which they are an associate of the director) have not been paid to the Commissioner by the last day for remitting any of the amounts withheld during the associate’s income year.

An ‘associate’ is defined in Section 995-1 of the Income Tax Assessment Act 1997 as having the meaning given by Section 318 of the Income Tax Assessment Act 1936.  The latter section provides a very broad definition of ‘associates of a natural person’ which includes relatives, partners, a spouse and children of the natural person.

Employees who are not associates of a company director are not liable to pay the PAYG withholding non-compliance tax.

Merely being an associate of the director does not mean that an individual is liable to pay the tax.  The Commissioner must also be satisfied that, among other things, due to the associate’s relationship with the director or their relationship with the company, that the associate knew, or could reasonably be expected to have known, that the company had failed to pay amounts withheld to Commissioner.

In addition to the knowledge or reasonable expectation of knowledge requirement, the Commissioner must also be satisfied that the associate did not:

  • take reasonable steps to influence the director to cause the company to notify the Commissioner about the amount withheld,
  • take reasonable steps to influence the director to cause the company to pay the withheld amounts to the Commissioner,
  • take reasonable steps to influence the director to appoint an administrator or have the company wound up, or
  • report to the Commissioner or other relevant authority that the company has not paid the amount withheld to the Commissioner.

If a company director or their associate is liable to pay PAYG withholding non-compliance tax, the Commissioner may only commence proceedings to recover the tax after issuing a notice to the individual.

The Commissioner must not issue a notice to enable recovery of PAYG withholding non-compliance tax from a director if that director has a Director Penalty liability that relates to the company’s failure to meet its PAYG withholding obligations. The Commissioner must not issue a notice to enable recovery against an associate if the director who the individual is an associate of has a director penalty liability that relates to the company’s failure to meet its PAYG withholding obligations.

A director or an associate who receives a notice enabling the Commissioner to recover an amount of PAYG withholding non-compliance tax may object to any decision the Commissioner has made. The PAYG withholding non-compliance tax applies to amounts withheld during the 2011-12 income year and later income years, if the company withholding the amounts is required to pay those amounts to the Commissioner on or after the amendments formally commenced, being 30 June 2012.

Right of Indemnity and Contribution

This legislation outlines the rights of a director who pays a liability of the company as against the other directors who were also liable to pay the penalties. To deal with the potential unfairness associated with recovering different amounts from company directors, a right of indemnity and contribution allows directors to recover amounts they have paid on behalf of the company against the company or its other directors.

Associates who have been levied with a PAYG withholding non-compliance tax also have right of indemnity and contribution, to claim back tax they have paid. However no individual may recover their contribution from an associate.

The right of indemnity and contribution seeks to ensure that any one individual, particularly an associate, is not solely responsible for the financial burden caused by the company’s failure to comply with its obligations.

DISCLAIMER

The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Cor Cordis or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

LINK TO ATO WEBSITES

https://www.ato.gov.au/Business/Payments-to-ATO/Difficulty-paying/What-if-you-can-t-pay-your-tax-/Stronger-measures/Director-penalty-notices/

https://www.ato.gov.au/General/Gen/Strengthening-director-obligations/?anchor=H1#H1