Pay up or shut up shop

Take outs:

• The Australian Tax Office (ATO) has escalated its enforcement actions against small businesses with unpaid tax debts, including issuing Director Penalty Notices (DPNs), garnishing wages, and withholding tax credits. This marks a shift from previous leniency due to rising tax debt, particularly among small businesses.
  
  
• Small businesses facing tax debt can take steps to resolve it, such as entering into payment plans with the ATO or using the Small Business Restructure Scheme. The latter allows businesses to restructure their debts, keeping control of operations while negotiating with creditors, with ATO debt often settled for a fraction of the owed amount.
  
  
• The Small Business Restructure Scheme introduced in 2021 enables viable businesses to reduce debt and continue trading through financial hardship. This option is available for businesses with liabilities under $1 million and allows directors to remain in charge during the process.
  
  
• Business owners are encouraged to seek help if they are struggling with tax debts. They can access support from the Tax Ombudsman, the Australian Small Business and Family Enterprise Ombudsman, and the ATO’s education courses to navigate disputes and explore options like payment plans and restructuring.
  
  

Tax debt ultimatums ramp up but there are options for distressed businesses

After warning small businesses to stop using unpaid tax as a 'cash flow buffer', the Australian Tax Office has dramatically escalated enforcement actions.

Soaring numbers of company directors are being ordered to pay business debts as the ATO attempts to draw a hard line under years of leniency.

In the 2023/24 financial year, the ATO issued 26,702 Director Penalty Notices (DPNs), which hold company leaders personally liable for their organisation's outstanding tax debts. That's a leap of more than 50 per cent on the 2022/23 total of 17,459 DPNs, and more than double the pre-COVID-19 number of 13,120 issued in 2018-19.

Prior to 2024, the ATO had adopted an accommodating posture on late payments. But it has lost patience as tax debt soars, fearing some businesses are using money collected as tax to keep their companies afloat.

ATO Commissioner Rob Heferen told a Council of Small Business Organisations of Australia event: "A significant portion of the (tax) amount going unpaid is GST collected from consumers or PAYG withholding, withheld from employees pay. We are seeing an increasing number of businesses fall behind on these types of payments."

This echoes the frustrations of former commissioner Chris Jordan, who retired in early 2024, after warning business owners: "The ATO is not a bank offering cheap loans and a cash flow buffer. Paying tax isn't optional."

At the start of 2024, Australian businesses owed a staggering $52.4 billion in unpaid taxes with the lion's share of $34 billion owed by small businesses.

That's why the ATO has 'come out with a vengeance' this year in pursuing business tax debt, according to insolvency and restructuring expert Jarvis Archer, of Business Reset. Mr Archer told ABC's The Business: "Their message is very clear - pay your debt, restructure it to an affordable level, or you'll close the business. And if you don't make that decision, then we will force that decision upon you."

Enforcement action by the ATO includes:

• Issuing DPNs

• Revealing tax debt to credit reporting agencies

• Garnishing wages

• Talking action to wind up businesses
  
  
• Withholding tax credits and refunds to offset debt

Ramped up enforcement comes at a difficult time for small business operators, with cost of living pressure not only hitting personally, but professionally. However, now is the time to get tax debts in order as employers need to be mindful that from July 1, 2026, they will be required to pay super entitlements at the same time wages are paid.

For those with outstanding tax debts, the best option is to get on the front foot before the ATO comes knocking, with a number of options available to business owners.

Pay Up

Sole traders or businesses experiencing financial difficulty can apply to pay off tax debt by instalments through a payment plan. Although this can avoid or delay enforcement action, entering into an approved payment plan with the ATO does not prevent interest accruing until the total debt is paid off.

Individuals, sole traders and businesses can request to enter a payment plan. This can be done online for tax debts of less than $200,000. Higher debt requires direct contact with the ATO.

Restructure

Restructuring can be an effective way for distressed companies to significantly reduce debt.

In 2021 the Federal Government introduced Simplified Debt Restructuring rules which allows small business owners to remain in charge - rather than entering external administration - while they negotiate a deal with creditors which may allow them to trade through hardship. It aims to break the domino effect of one business failure taking others down with it. Helping viable businesses survive a crisis can deliver better outcomes for not only owners and employees but creditors, who risk being left entirely out of pocket when a company enters administration.

The scheme is supervised by the Australian Securities and Investment Commission (ASIC), who released a report last year that revealed 72 companies had debt-restructure proposals accepted by creditors in the first 18 months of the scheme's operation (January 2021 - June 2022). In 79 per cent of these cases most debt was owed to the ATO and, on average, creditors agreed to settle for payment of 15 cents in the dollar as part of a debt restructure plan.

More detailed information about using the Small Business Restructure Scheme (Scheme) is available on the ASIC website but to be eligible businesses must:

• Be incorporated under the Corporations Act.

• Have total liabilities less than $1 million.

• Resolve that it is insolvent or likely to imminently become insolvent, and that a small business restructuring practitioner (SBRP) should be appointed. Directors remain in charge of day-to-day operation of the business throughout.

• Have paid employee entitlements (such as outstanding super). While other tax debts do not need to be paid, up-to-date returns must have been lodged.
  
  
• When a company enters into restructure, a moratorium is applied on unsecured (and some secured) creditor claims. A payment proposal must be put to creditors within 20 business days with at least 50 per cent of creditors (by value) required to support the plan.

ASIC reported the Scheme has been used most by firms in Victoria and New South Wales, predominantly in the construction and accommodation & food sectors.

Seek Help

Although it is stepping up enforcement action, the Federal Government is also sensitive to perceived heavy-handed debt collection strategies. In March this year the Tax Ombudsman released a report to guide Government departments titled "How to tell people they owe the government money".

The report outlines five principles Government entities are expected to follow:

• Being accountable

• Providing full explanations for actions

• Providing information

• Being accessible
  
  
• Learning and improving

The Tax Ombudsman can investigate tax disputes that are not resolved through the ATO's formal complaint/dispute process.

Before it gets to this stage, small business owners can also seek help through the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). The ASBFEO has a guide to progressing a dispute with the ATO and a low-cost Tax Concierge service.

The ATO also runs education courses for small business owners.

The information provided in this article is a selection of information taken from publicly available sources and is current as at the date specified in the information. This article has been written for general informational purposes only and is not intended to provide, and should not be relied on, for tax, legal or accounting advice. We encourage you to consult your own tax, legal and accounting advisors before engaging in any transaction.