We have written several articles since the onset of the COVID-19 pandemic regarding the relative lack of enforcement from the Australian Taxation Office with SMEs on the issue of debt recovery.
It is well documented that the ATO has initiated just a handful of winding up petitions since the beginning of 2020. This ‘hands off’ approach has been implemented in direct association with the challenges and uncertainties posed by the pandemic. In addition, the ATO has also held back on issuing Director Penalty Notices – a debt recovery tool available to the ATO that remarkably, only a seldom few directors know much about.
The receipt of a DPN often motivates a director to reach out to us for assistance via their advisors; however we have not seen a DPN since late 2019. Whilst the rate of issue of DPNs by the ATO is unpredictable, our understanding is that the ATO has, in the past, issued in excess of 10,000 DPNs a year. Their absence in recent times, and the pressure that they can bring for directors therefore, is significant.
Having said that, we understand the ATO is becoming firmer in its approach to debt recovery, highlighted by and increased rigidity from the ATO on the issue of payment plans. As we have said in the past, we expect that after the federal election in May, the ATO will likely return to “business as usual” when it comes to debt recovery and enforcement. We expect that DPNs will be a key feature of the ATO’s initial debt recovery processes.
With the passing of time since the start of the pandemic, the insolvency landscape has changed to some degree. This means that DPNs too will be modified to suit the new regime.
We have written to our network about DPNs on a number of occasions, so I do not intend to revisit the two types of DPNs and the important matters that accountants and advisors should be aware of in this article. Read more about DPNs here.
What I will highlight here is what has changed when it comes to DPNs.
First, with the introduction of the Small Business Restructuring regime in January 2021, the appointment of a Small Business Restructuring Practitioner will, amongst other options, alleviate a director of a non-lockdown personal liability if the appointment is made within 21 days of the date of the DPN. The new words on a non-lockdown DPN will read something like this:
The penalty will be remitted if:
a) The company’s liability has been discharged; or
b) The company is under administration within the meaning of section 436A, 436B or 436C of the Corporations Act 2001; or
c) The company is being wound up; or
d) The company appoints a Small Business Restructuring Practitioner
within 21 days from the date on which the enclosed notice is given to you; that is, 21 days from the date of issue of this letter.
The above change makes logical sense, given the SBR regime is now a formal option for SMEs under the Corporations Act 2001 to investigate a turnaround or restructuring of their affairs.
A perhaps more interesting and subtle change however to DPNs is the subtraction of the payment plan option to suppress the ATO’s enforcement of a DPN liability against a director. This change applies to both non-lockdown and lockdown DPNs.
In the case of a non-lockdown DPN, the ATO will cease the enforcement of a DPN liability against a director if one of the aforementioned options is acted upon (i.e. the three pre-existing options of paying the debt or entering into voluntary administration or liquidation and moving forward, the new option of appointing a SBRP) or if the company enters into a payment plan under section 255-15 of Schedule 1 of the Taxation Administration Act 1953 within 21 days of the date of the DPN.
In other words, previously, if the company did not pay the debt in full or enter into external administration within 21 days, a director could delay enforcement against him or her personally if the company entered into a complying payment plan. The payment plan option now appears to be off the table.
This now means that upon receipt of a non-lockdown DPN, a director will either have to cause the company to pay the debt in full or place the company into external administration within 21 days to avoid enforcement by the ATO of the personal liability, which may mean the issuance of a bankruptcy notice and subsequently a creditors’ petition to bankrupt the director.
In the case of a lockdown DPN, where entering into external administration is not given to a director as an option to avoid personal liability, the previous options were to pay the debt in full or enter into a complying payment plan. The payment plan option is now also not available for lockdown DPNs.
These changes are important to be aware of for your clients because we anticipate that DPNs will again become a regular option for the ATO to recover outstanding amounts.
There are many indicators pointing towards a strong and stable national economy. With the federal election not too far away and the new financial year fast approaching, we expect that the ATO will become increasingly direct in its debt recovery processes.
If you have any clients who you believe may be exposed to a DPN liability, it is best to be proactive in addressing the issues and not waiting for the 21 day clock to start ticking when options become more limited. Please feel free to get in touch if you require any further guidance on these issues.
About the author
Greg Quin is a Partner and Registered Liquidator at HLB Mann Judd Insolvency WA and has been with the team for 12 years. Greg oversees the daily operations of the many insolvency appointments managed by the HLB Insolvency team and looks after the operations of the practice.
If you have any queries about insolvency matters, please feel free to contact Greg on 08 9215 7900, 0402 943 091 or via email to firstname.lastname@example.org.