At some stage, every business will have some trouble paying its tax debts. In particular, those monthly and quarterly BAS debts seem to roll around very quickly.
A traditional response from SME owners to a tax debt problem has been the head-in-the-sand approach – lodge the BAS late, or not at all, ignore the tax debt and hope it either goes away (rarely successful) or that the business cash flow can catch up before the taxman gets too nasty (often but not always successful).
However, that approach was dealt a deadly blow in June 2012 when new tax laws were passed that make directors automatically personally liable for company PAYG and superannuation debts if the returns are not lodged within three months of their due dates. So the new approach must be “lodge”, and that means “lodge your tax returns even if the company can’t pay the tax debt”.
The clear objective of the new laws was to strongly encourage directors to get their tax returns lodged so the taxman can either collect the debt or, if need be, negotiate repayment terms.
So don’t panic if your company can’t pay a tax debt when it is due – but make sure you lodge the returns. The taxman is pretty generous in granting payment arrangements to struggling taxpayers. You might have read in the press recently that the ATO is getting less generous in giving businesses leeway. From experience, I can confirm that this is true but he’s still pretty good.
If your business owes less than $25,000, then it is as easy as using the ATO’s automated hotline to arrange a late payment or obtain an instalment plan. That plan could be, say, $5000 a week for five weeks. It’s as easy as pushing buttons on your phone – try getting that deal with any of your other creditors!
If you owe more than $25,000, it’s a little harder. The company’s tax or BAS agent will have to submit a request to the ATO and they may have to provide a quantity of other information to prove the company can ultimately pay the debt and has made reasonable efforts to raise the funds. Again, that’s pretty generous.
For those businesses that are experiencing more severe difficulties, it is possible to arrange an instalment plan of up to 12 months. You’ll have to prove more again on the viability of the business and arrange a regular direct debit. In these cases, the taxman will even forgo the general interest charge – generous indeed.
That all sounds good but there are some traps.
Most importantly, if you, as a director, have received a Director Penalty Notice then beware. It’s a little hard to tell from the DPN, but a careful reading reveals that if the company enters a repayment scheme with the ATO then directors are not relieved of personal liability. That is, you will still be on the hook personally for the debt on the DPN if the company defaults on a repayment scheme.
A second consideration – whilst the ATO will be understanding the first time it is necessary for your company to enter a payment arrangement, it will be much less understanding if there is a default. You might get a second chance, or not. What you do know is that if the company can’t pay the amounts due and thus defaults, at some stage the matter will be referred to the ATO enforcement division and your company will be put on the “railway tracks” of the enforcement process. That is, the ATO will simply apply its processes and procedures in pursuit of the outstanding debt and there will be little if any further negotiation.
Now, a last word of caution. As a director you need to ask yourself if your company is indeed solvent. Entering a payment arrangement with the ATO is one of the signs of insolvency. So you want to be able to rationalise the situation such that if you enter the ATO payment arrangement, then it’s necessary because your company has a short-term cash flow problem – that is, not a longer term solvency problem. If it is short-term, that’s fine. If not, then maybe you need to be looking for a more comprehensive solution, which could be a company restructuring or even a voluntary administration.