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What happens if you don’t pay your business tax debt?

Posted 29 Jul '22

What happens if you don’t pay your business tax debt?

The ATO understands that taxpayers, particularly small business operators and sole traders, sometimes have cash flow issues meaning they can’t pay their whole tax bill on time. If you have a problem, the ATO encourages you to engage with them early so they can help you deal with your debt while it’s manageable. Therefore, contact your accountant if you need help in this area, it’s much better financially to take the required actions early rather than do nothing and expect it to go away.

If you don’t pay the amounts you owe the ATO on time, they will charge interest on your unpaid amounts and use any future refunds or credits to repay the amounts you owe.

The ATO may also take stronger action if you are unwilling to work with them to address your debt or repeatedly default on agreed payment plans. For example, they can issue a Director Penalty Notice and disclose your business tax debts to credit reporting bureaus such as Equifax, which may limit your ability to take out a loan in the future.

Debts on hold

An aged debt is an uneconomical non-pursued debt that the ATO has placed on hold (it does not show as an outstanding balance on your ATO account) and has not undertaken any recent action to collect.

If you have an aged debt, you may receive a letter from the ATO reminding you of the debt.

From June 2022, the ATO will recommence offsetting any tax refunds or credits to pay off any debts on hold. In some cases, the ATO may use credits from other government agencies to pay off the aged debt.

Director penalties

The ATO has published on its website detailed information about the responsibilities of a company director for ensuring that the company’s tax and superannuation guarantee (SG) obligations are reported and paid on time.

If you are a current or former company director, the ATO can recover from your unpaid amounts of:

  • Pay as you go withholding (PAYGW);
  • GST; and
  • Superannuation Guarantee (SG) charge.

If these obligations are not met, you become personally liable for the unpaid amounts, unless you take steps to ensure the company meets its obligations, appoints an administrator or goes into liquidation (only within certain time limits).

Any amounts that you are personally liable for are called director penalties. The ATO can recover the penalty amounts from you after issuing a Director Penalty Notice (DPN).

Becoming a new company director

Before you become a company director, check if the company has any unpaid or unreported PAYGW, GST and SG charge liabilities. Once you are appointed as a company director, you are responsible for ensuring the company meets its PAYGW, net GST and SG charge obligations in full by the due date.

You are no longer a director

If you resign as a director of the company, you remain liable for director penalties for liabilities of the company that were due before the date of your resignation. In certain circumstances, you may also be liable for liabilities that fall due after your resignation.

Director penalty notices

Before recovering your company’s unpaid amounts, the ATO must give you a DPN. The notice outlines the unpaid amounts and remission options available to you.

The ATO can recover the amounts of the director penalty by:

  • issuing garnishee notices;
  • offsetting any of your tax credits against the director penalty;
  • initiating legal recovery proceedings against you to recover the director penalty.

Director penalties are a parallel liability

Once DPNs have been issued, the ATO may commence or recommence recovery action from each director personally, because these penalties are a parallel liability.

To recover the debt, the Commissioner can pursue either the company or the directors.

This means that any payment or credit applied to the company’s account, or to a director’s account, to reduce the penalty will reduce the director penalty amount for the other directors and the company’s corresponding liability for the same reporting period.

Tip! Talk to us if you are a company director and the company owes PAYGW amounts, GST or SG charge.

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