Tax Debt Disputes

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If you are currently facing enforcement action by the ATO, then we strongly encourage you to book in a free 15-minute consultation with our tax debt dispute lawyers to discuss your matter and determine how a resolution can be achieved.

Executive Summary

Following COVID-19, the Australian Taxation Office (ATO) had begun to crack down on tax debts, specifically small business tax. At the end of January 2024, the ATO debt reports through small business BAS comprised roughly of:

​

1. $8.5 billion of unpaid GST;

2. $8.1 billion of unpaid Pay As You Go Withholding (PAYGW);

3. $5.5 billion of unpaid Pay As You Go Instalments (PAYGI); and

4. $1.9 billion of unpaid Superannuation Guarantee.

This has resulted in a significant increase in director penalty notices (DPN), garnishee notices, Court proceedings for the recovery of the debts, statutory demands and Federal Court proceedings to wind up companies.

Tax debts are rather difficult to defend due to the ‘conclusive evidence rule’, which essentially says that if the ATO does an assessment and it says you owe $150,000.00, then you owe $150,000.00 and it is up to you do demonstrate that you do not.

In this article, our tax debt dispute lawyers will set out the consequences of company (and its director/s) not promptly dealing with their tax obligations.

What is a Tax Debt?

This is rather self-explanatory, but it is a debt owing to the ATO, by:

1. an individual; or
   

2. a company; or
   

3. a director on behalf of a company.
   

A company’s liability may arise in circumstances where they have failed to keep their relevant taxation lodgments up to date (i.e. GST, PAYG, SGC) or the company has failed to pay the respective amounts owed to the ATO. This may result in the company be placed into administration or liquidation (voluntary or involuntary).

There is however a common misconception that by placing the company into administration or liquidation, the company’s taxation liabilities will be dealt with. If there are sufficient funds or assets to discharge the company’s taxation liabilities (among other debts), then this may be the correct. However, if there are insufficient funds or assets to the company’s taxation liabilities (which is common), then the director/s of the company could still be liable for the tax debt.

Division 269 – 15 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (the Act) states that:

‘Directors’ obligations

(1) The directors (within the meaning of the Corporations Act 2001) of the company (from time to time) on or after the initial day must cause the company to comply with its obligation.

(2) The directors of the company (from time to time) continue to be under their obligation until:

(a) the company complies with its obligation; or

(b) an administrator of the company is appointed under section 436A, 436B or 436C of the Corporations Act 2001; or

(ba) a small business restructuring practitioner for the company is appointed under section 453B of that Act; or

(c) the company begins to be wound up (within the meaning of that Act).

(2A) To avoid doubt, if the obligation of the company is an obligation to pay the amount of an estimate of an underlying liability under Division 268, a director is subject to his or her obligation under subsection (1):

(a) even if the underlying liability never existed or has been discharged in full; and

(b) even if the unpaid amount of the underlying liability is less than the unpaid amount of the estimate; and

(c) at all times on and after the day referred to in paragraph 269-10(5)(b) until the director’s obligation ceases under subsection (2) of this section, including at any such times before the Commissioner has made the estimate or given notice of the estimate.

…’

Division 269- 20 goes onto further state that:

‘Penalty for director on or before due day

(1) You are liable to pay to the Commissioner a penalty if:

(a) at the end of the due day, the directors of the company are still under an obligation under section 269-15; and

(b) you were under that obligation at or before that time (because you were a director).

Note: Paragraph (1)(b) applies even if you stopped being a director before the end of the due day: see subsection 269-15(2).

(2) The penalty is due and payable at the end of the due day.

…’

This essentially means that the director/s of the company must ensure that it complies with its taxation obligations. If the company fails to do so, then all directors of the company become personally liable to pay a penalty equal to the company’s unpaid taxation liability.

Unfortunately, this is something that not a lot of people are aware of, which results in the ATO chasing them personally for the company’s unpaid taxation liability, including after the company has been liquidated or wound up for a significant period. We have seen the ATO chase debts that have been outstanding for more than ten (10) years.

 How does the ATO deal with Tax Debts?

To enforce the payment of the tax debt, the ATO may:

1. Contact you to discuss and arrange a payment proposal, or encourage you to do so;
   

2. Issue a letter of demand;
   

3. Issue a director penalty notices;
   

4. Commence legal proceedings;
   

5. Issue a statutory demand and commence winding up proceedings; or
   

6. Issue a bankruptcy notice and commence bankruptcy proceedings.
   

We will expand on each of these items in separate subsequent articles.

Conclusion

If the ATO has taken any of the above steps, it is recommended that you act promptly to mitigate the risks, or alternatively, to allow sufficient time to resolve the dispute.

If you are currently facing enforcement action by the ATO, then we strongly encourage you to book in a free 15-minute consultation with our tax debt dispute lawyers to discuss your matter and determine how a resolution can be achieved.