If you have a tax debt, it’s crucial to understand when and how to engage with the ATO.
There are often opportunities to reduce or challenge your tax debt, or negotiate an arrangement with the ATO to enable you to repay your debt within your means.
But the ATO is not like a normal commercial creditor. It has unique behaviours in the way it identifies, negotiates and pursues tax debt.
Amongst company directors and taxpayers more broadly, there are a lot of misunderstandings about how the ATO operates when it comes to issuing director penalty notices and collecting tax debts.
Tuan Van Le (Aptum Legal) and Olga Koskie (Tax Assure) – experts in disputing and negotiating ATO tax debt – have joined forces to answer all the most frequently asked questions they hear from clients.
Tuan is a litigator with over 15 years’ experience, including as the former Executive Director of the ATO’s litigation department and a Judicial Registrar of the Federal Court of Australia. Olga is a lawyer and business advisor with over 15 years’ experience – an expert in negotiating with the ATO to reduce tax debt.
1. If the ATO hasn’t contacted me, do they know I owe them money?
If you haven’t heard from the ATO, but you know you have an outstanding tax debt, then the ATO knows too. The ATO has powerful data matching technology that compiles information from a variety of third-party sources, enabling them to detect people and businesses who are not complying with their obligations.
Olga (Tax Assure): “Currently, there is no formula as to why one person or business will be targeted by the ATO – such as through a warning letter, a firmer action letter or be reported to a credit reporting agency – but another won’t.
“However, if you proactively take steps before you receive recovery action from the ATO, then you’re in a much better position to negotiate the reduction of the debt and negotiate a payment arrangement. Whereas if your debt lies unattended, then your risk rating may go up and more flags will likely be placed on your file.”
2. What is a Director Penalty Notice (DPN)?
A director of a company can be made personally liable for unpaid PAYG withholding liabilities, superannuation guarantee charge, and recently, GST.
Before the ATO can start legal proceedings against directors to recover these liabilities, they must issue what is called a director penalty notice (DPN).
If your company has a tax debt, you will already be personally liable for the debt before you receive a DPN. Once the DPN is issued to you, that is the very first step in the ATO taking proceedings against you personally to recover the company’s debt. It is the crystallisation of when the ATO may issue a statement of claim against you, meaning that the ATO is taking steps to sue you personally for your company’s debt.
3. What to do if you get a DPN?
If you receive a DPN, the first thing to note is that you should not ignore it or throw it in the bin. There are strict timeframes within which you can respond to a DPN.
There are three different scenarios you may find yourself in when you receive a DPN:
1) You accept that you owe the debt
You might not be happy about it – but you know that you owe it. The most important thing to do is to act quickly to give yourself the option to enter into a payment plan before the DPN expires (21 days after it is issued).
If you get into a compliant payment plan (which doesn’t mean paying the full debt, but instead paying what you can afford and what the ATO agrees to), then there won’t be any further legal action against you.
2) You dispute that you owe the debt
For example, you might argue that you weren’t a director during the specified time, that you never received the notice, or that the liability itself is incorrect. In these circumstances, it is preferable to seek the advice of a tax lawyer as soon as possible.
3) The company is no longer trading
If the company is no longer trading and is not viable, you may want to consider an event of insolvency to wind up the company.
4. How long do I have to respond to a DPN?
You have 21 days to take steps to comply with a standard DPN, which is the most common type of DPN.
It is important to note that the 21 days starts from the issue date of the DPN. That is the day that the ATO prepares it and puts it in the post. It is not the date when you actually receive it.
Olga (Tax Assure): “When the deadline is approaching, say four or five days before the expiry, many people feel that it’s too late, that there’s nothing that can be done. However, this is not the case. The engagement process with the ATO can occur very quickly.”
This is crucial because being in an active payment arrangement is the only thing – without going through a court process – that stops further action from a DPN.
5. Can you negotiate ATO tax debt?
In short, yes and no.
The ATO is not like a general commercial creditor and does not engage in normal commercial negotiations.
Tax debt is composed of core debt plus any interest and penalties. Core debt cannot be negotiated away. Whereas interest and penalties are negotiable if you meet the ATO’s legal practice requirements as to why they should be written off.
Tuan (Aptum): “When I was a litigator for the ATO, it was common for taxpayers with large sums of tax debt to approach the ATO and offer, for example, to pay 50% of their debt within 30 days if it would resolve the matter. Unfortunately, the ATO does not allow this. They are under a statutory duty to recover tax debts unless they are irrecoverable at law or uneconomical to pursue.”
Olga (Tax Assure): “I often hear people refer to someone at the pub who told them that the ATO can get rid of their debt. Whereas, aside from the interest and penalties, the only way you can reduce core debt is in the event of insolvency, or if you dispute the underlying liability by lodging an objection or you go to the Administrative Appeals Tribunal or to the court.”
6. Can you enter into a payment plan with the ATO?
Yes – and it is important to understand that being compliant with the ATO doesn’t necessarily mean paying the whole debt.
Compliance can also mean being in a payment plan. Once you are in a payment plan, the full amount is not due and payable, and you are compliant.
Payment plans can match your cash flow. The amount payable on a monthly basis does not have to be determined simply by dividing the full sum of the debt over by a set period of time. These terms can be negotiated with the ATO.
Olga (Tax Assure): “Lots of people come to us and say that they’ve heard they need to pay 50% upfront and the rest within six months. It’s very rare that we would do an upfront payment for a payment plan. There are rules around what the ATO can and can’t accept, and a big part of what we do is knowing those parameters to get the best arrangement in place.”
7. How long does the ATO give you to repay a tax debt?
If you get a call from the ATO, they are most likely going to ask you to pay between 20% and 50% of the debt upfront and then pay the rest between 6-12 months. That’s their standard request, though you can negotiate these terms.
With a well-prepared application, you can typically get around three years to repay your tax debt. There are some exceptions to this, which can depend on the level of debt, how many defaults you’ve had and which section you’re in within the ATO, but generally you can get up to three years.
8. What happens if I can’t meet my ATO payment plan?
If you miss a payment, the payment plan will default. If you don’t pay any of your ongoing liabilities, the payment plan will also default.
If you’re in a payment plan and the amounts are onerous or you don’t think you’ll be able to continue to comply, it is much better to be proactive and renegotiate that payment plan to meet your current cash flow and your current business viability, rather than default on the plan.
Olga (Tax Assure): “A client came to us with a $250,000 debt and had organised a payment arrangement with the ATO themselves, which was $5,000 per week and putting stress on their cash flow. We were able to reduce the debt upfront by $50,000 by removing all the interest and penalties and put them on a $5,000 per month payment plan, which was much more suitable to the client’s circumstances.”
9. Can the ATO refuse a payment plan?
The ATO does have the ability to reject or refuse a payment plan in certain circumstances.
This can occur if, for example:
You have poor compliance history, such as if you have been non-compliant for a number of years and haven’t contacted the ATO;
Your application for a payment plan requests unreasonable conditions, such as for too long a period of time; or
You have previously made an unsuccessful application for remission of your tax debt which did not provide adequate detail.
If the ATO refuses your payment arrangement application, it may be possible to secure a payment plan upon resubmission by offering better terms to the ATO. However, it is preferable to have a well-prepared application on the first submission to have the best chance of securing a payment arrangement that is suited to your circumstances.
10. Does getting into an ATO payment plan remit director penalty liability?
Tuan (Aptum): “There is a mistaken belief amongst some insolvency practitioners that being in a compliant payment arrangement with the ATO will remit director penalty liability. This is not the case, however it is a consideration in terms of statutory defences.”
One of the statutory defences for director penalty liability is that the director took all reasonable steps. If you can show that the company and the director tried to engage with the tax office and enter into a payment arrangement, then it is a strong consideration for this defence.
11. Can the ATO take my house?
Tuan (Aptum): “The ATO will say in its statements that it generally doesn’t resort to taxpayers’ homes, but in reality, the ATO can take your house if you have unpaid tax debt.”
There are three ways this can occur:
The issue of a warrant of seizure and sale. This authorises an enforcement officer to sell your property to satisfy your debt. This is quite uncommon, but there have been instances of this in the past.
If you enter into a security arrangement with the ATO, for example, if you offer them a mortgage in order to obtain a long-term payment arrangement, then the ATO can call in on that mortgage. Again, this is quite uncommon.
The ATO can make you bankrupt. In this case, a bankruptcy in trustee will be appointed. They will gain control of all your assets and can sell assets in your name. This is the most common of these three options.
Of course, there are ways to prevent this from occurring by engaging with the ATO and seeking help from legal and tax professional as soon as possible.
12. How do I dispute ATO debt?
If you disagree with the amount of your tax debt, there are a few avenues to dispute it:
Arguing that the underlying liability is incorrect;
Arguing that there was some form of invalidity in the ATO raising the liability and in issuing the DPN. It is quite common to have issues regarding service of DPNs; or
Arguing that any statutory defences apply. As a director, this includes whether you took all reasonable steps to comply with your obligations (such as by relying on advice from a chief financial officer or accountant) or if you did not take part in the management of the company for illness or some other good reason.