Is your business prepared for the cessation of COVID-19 financial assistance, and the change to the Australian Taxation Office’s approach to compliance monitoring and debt collection? Businesses can ill afford to bury their heads in the sand, and risk getting stung with significant penalties, or a Director Penalty Notice. Discover everything you need to know about the latest changes, and how to protect your business, today.
The economic impacts of the pandemic have had considerable effects on small-to-medium enterprises (SME) across Australia. As millions of businesses look to navigate operations in the current environment, the Australian Taxation Office (ATO) has revealed it is narrowing its focus on companies that have not met its compliance obligations, including those with outstanding wages tax withholding debts, unpaid or late Superannuation and GST, and much more.
If your business relied on the ATO’s leniency towards PAYG wages tax withholding, superannuation or GST payments, or if it utilised financial support during the pandemic, now is the time to ensure all your financial and compliance-ducks are in a row. The ramifications of these latest changes by the ATO may be severe, including getting stung with a Director Penalty Notice, or your company credit score lowering due to a tax debt being reported to a credit reporting agency.
Let’s be realistic; it’s not uncommon for business owners with busy schedules to have limited time and availability to ensure they’re adapting to the latest ATO rules. Luckily, this is not a process you have to go at alone. Let’s explore the current challenges your SME may be facing in a post-pandemic world and the potential implications of the latest ATO rules, as well as how an adviser, like Myssy + Co, can walk alongside you and support your business for the future.
The changing business environment: ATO withdraws COVID-19 support
The ATO was generous in the concessions it provided businesses, like yours, to keep their head above water during the COVID-19 pandemic. Between being able to defer and delay PAYG wages tax withholding, as well as delaying payment for major costs, such as GST and income tax , SMEs were able to keep their doors open in highly uncertain times. While businesses understand the importance of meeting their obligations, these leniencies were invaluable in allowing millions of Australian businesses to continue operating in two years of unprecedented times.
However, as Australia emerges from the worst of the pandemic, and restrictions ease across the globe, the ATO has shifted quite suddenly back to business as usual. Clemency is no longer being offered to business owners as it was during 2020 and 2021. Your business no longer has additional time to repay loans through loan holidays nor can it rely on the leniency offered for overdue tax debts and compulsory payments. At the same time, access to government support has ended.
Some of the most significant changes made in recent times include:
- The withdrawal of Government assistance, tax relief and rent relief.
- ATO is actively pursuing tax debts and lodgements after a 2 year hiatus.
- Relatively sudden difficulty in putting ATO debt onto a payment plan.
- The ATO is now issuing Director Penalty Notices (DPN) for late reported and unpaid super/GST/wage tax.
- ATO monitoring and contacting businesses for non-compliance with Superannuation Guarantee Charge (SGC audits).
- ATO contacting reporting agencies, adversely impacting credit scores and the ability to borrow.
- ATO enforcement of Division 7A shareholder loans rules has recommenced.
Meanwhile, Australian businesses are still facing many of the same stresses that pushed them to seek support from the government, or take advantage of ATO leniency, as well as new challenges that have emerged in 2022. All of which put downward pressure on your bottom line. Between ongoing global and domestic supply chain delays, materials shortages, rising inflation, hikes to interest rates for business loans, as well as skilled labour shortages, businesses have enough on their plates at the moment without facing additional penalties from the ATO.
Your SME may not be able to afford you being caught off guard by this renewed ATO focus on debts and obligations.
Challenges for Business Owners in a Post-Pandemic World
Whether your business took one or multiple forms of assistance, or has delayed payment for key accounts operations, the deadline is approaching to get your house in order. The impacts of not putting in place procedures, or dividing up resources, to address these changes could be severe.
These are the most significant challenges business owners will be facing, off the back of the ATO changes, in this post-pandemic world:
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Paying back existing Div 7A shareholder loans
A Division 7A loan (or Div 7A) is simply a loan made by a private company to a shareholder or their associate. While that appears simple on the surface, Division 7A of the Income Tax Assessment Act 1936 extends the meaning of ‘loan’ to include:
- “An advance of money,
- A provision of credit or any other form of financial accommodation,
- A payment for a shareholder or their associate, on their account, on their behalf, or at their request if they have an obligation to repay the amount, and
- A transaction (whatever its terms or form) that is the same as a loan of money”.
Division 7A is in place to ensure that these private company loans are at an ‘arm’s length”, and as such, require a minimum annual repayment, minimum interest rate as well as a maximum loan term. Where a borrower is not compliant with those conditions, the unpaid loan balance can become assessable income to the borrower as an unfranked dividend. This can create devastating consequences for the shareholder or their associate. Again, this is not just on money borrowed, but also relates to use of company assets.
The issue of Division 7A can compound an already precarious financial situation, as all outstanding loans will need to be repaid when a business looks to restructure or go into liquidation.
2. Late and unpaid super, GST and wage tax triggering Director Penalty Notices
During the pandemic, the ATO supported the community by effectively suspending their debt collection and compliance actions. This extended to collection of wages tax withholding, GST and income tax, as well as little resources being committed to chasing lodgements or payment of employee superannuation. While the business community enjoyed nearly 2 years of this environment, with little warning, the ATO is now aggressively pursuing compliance and debt payments.
One of the greatest tools at the ATO’s disposal is a Director Penalty Notice (DPN). A DPN makes a director personally liable for any unpaid wages tax, superannuation and GST. A director can seek relief from a DPN by doing the following:
- Paying the debt in full.
- Appointing an administrator under section 436A, 436B or 436C of the Corporations Act 2001.
- Appointing a small business restructuring practitioner under section 453B of that Act.
- The company begins to be wound up (within the meaning of the Corporations Act 2001).
That said, when we consider any relief, we must distinguish Director Penalty Notices between those that are issued for unpaid debts and those debts that are both unpaid and reported late. The latter situation triggers the issuing of a ‘lockdown’ DPN. Where a lockdown DPN has been issued, a director cannot get relief by putting the company into administration or liquidation. The only way to extinguish the DPN is to pay the debt in full. Otherwise, the debt has effectively now attached itself personally to the director.
It should be noted that, since February, putting the company debt onto a ATO payment plan will no longer extinguish a Director Penalty Notice.
An estimated 52,000 Director Penalty Notices (DPNs) have been issued by the ATO as of the 16th May 2022, with another estimate counting 30-40 DPNs registered each day since 13 May 2022 alone. It is clear that clemency is no longer being provided by the ATO, and businesses must be aware, and act accordingly, or face debilitating consequences.
In summary, a company director essentially has three options to extinguish a Director Penalty Notice:
- The Director pays the debt in question.
- The company pays the debt in question.
- The business considers speaking to an insolvency practitioner about liquidation, small business restructuring or administration. Note that with this option, the Director will still be personally liable under a ‘lockdown’ DPN.
Whatever the option that may be best suited to an individual’s circumstances, Myssy + Co strongly recommends prompt action once a DPN has been issued.
3. The ATO actively pursuing tax debts and lodgements
When it comes to tax debt, it’s not just the challenge of attending to Director Penalty Notices of which businesses need to be aware. The ATO is now actively pursuing the payment of business tax debt after a two year hiatus. As mentioned above, it has now become more difficult to put a payment plan in place, resulting in a hit to a business’ cash flow. The flow on effects could have considerable impacts on business growth, the ability to pay overheads, perform inventory forecasting, accept new work, and much more.
It is also recommended that businesses stay compliant with lodgements, as the ATO is now actively pursuing these after a two year period of clemency.
4. ATO contacting reporting agencies
Over the last two years, instances of significant tax debt were less likely to be reported to credit reporting bureaus, and businesses were protected from having this adverse event recorded on its credit file, impacting its company credit score and that of the associated directors.
Now, it appears the ATO is shifting back into gear, and once again prioritising the reporting of tax debts, if the business meets the following criteria:
- It has one or more tax debts and at least $100,000 is overdue by more than 90 days,
- The business is not engaging with the ATO to manage its tax debt.
Businesses can mitigate the risk to their credit score by being proactive and engaging with the ATO about this tax debt as soon as possible. Engaging with the ATO, in its words, means that you have:
- A payment plan, and you are complying with the terms of the arrangement,
- Applied for release from the tax debt,
- An active objection against a taxation decision to which the tax debt relates,
- An active review with the Administrative Appeals Tribunal (AAT) or an active appeal to the Court,
- An active review with the AAT of a reviewable decision which may affect the amount of a non-complying superannuation fund’s tax debt with the relevant regulator, and
- An active complaint with the IGTO in relation to the tax debt.
5. Impact of company tax debts on credit applications
It cannot be understated how challenging it can be for SMEs to operate as normal, and pursue credit, with ATO company debt listed against your company credit file. Having adverse events, such as outstanding debts, on a company credit report can not only lower your company credit score, but may make it more difficult to gain approval for business loans and other financial products.
During the application process of any credit product, the lender will perform a credit check on your company to assess its creditworthiness and likelihood it may default on the loan. Major banks in particular may be less likely to approve the business for a loan if it has an outstanding tax debt above $100,000. You may be able to gain approval for financing through a low-doc or alt-doc loan, or with a provider that favours businesses with below-average credit. However, these loans can be challenging to gain approval for, and may come with higher than average interest rates, fees, and other costs.
Not only that, but an ATO company debt on your credit file will also be visible to potential partner entities looking to engage with your business. Having this black mark on your company credit file could reduce your chances of securing new clients or trading partners, and may also affect gaining supplier accounts.
6. ATO review and enforcement of non-payment of superannuation (SGC audits)
Another crucial area being put back into the spotlight after two years of leniency from the ATO are employer superannuation guarantee audits. Thanks to the rollout of the Single Touch Payroll (STP) reporting, the ATO has comprehensive data on which businesses to target, particularly from reporting in both the 2020-2021 and 2021-2022 financial year. This includes businesses that utilised the superannuation guarantee amnesty offered by the ATO (which ended in September 2020), with auditing activity including all SG periods.
The penalties involved for non-payment of superannuation may cost businesses penalties up to 200% of the value of the unpaid super and interest, in addition to the actual super that still needs to be paid. It’s safe to say that the financial implications of these potential penalties, as well as the issuance of DPNs connected to these debts, could be significant to Australian businesses, if they do not voluntarily disclose any non-compliance to the ATO.
7. Withdrawal of government assistance, tax relief and rent relief
Arguably one of the biggest challenges business will be facing two years on from the emergence of COVID-19 in Australia is the withdrawal of government support including the various government assistance schemes, ATO pause on collection and compliance activity and landlord rent relief. This is especially relevant as many businesses are still experiencing the ramifications of the pandemic, despite the ATO shifting its stance.
If your business is still in need of financial support, it may be time to pivot to alternative options, such as accessing government grants and utilising current tax incentives to fund the business. This could include the Research & Development tax incentive, or the Export Markets Development Grant. For more detailed information on which government grants and schemes may be available to your business, please view our guide.
The implications of ATO changes post-pandemic for business owners
While all businesses understand the importance of paying what is owed, in the current conditions, the end of ATO clemency could have severe implications, including:
Director Penalty Notices – As touched on above, there are two types of DPNs, a Non-Lockdown DPN and a lockdown DPN. Where the ATO issues you a Non-Lockdown DPN, directors can avoid personal liability by repaying the debt or putting the company into liquidation or entering into Voluntary Administration.
Where a Lockdown DPN is issued, there is no room for a director to avoid personal liability unless the debt is paid in full. This type of DPN results from the late lodgement of Business Activity Statements or failure to report superannuation where a SGC deadline is passed.
Being hit with a DPN can cause a devastating blow to your cash flow, particularly now that entering into an ATO payment plan is no longer available as an option to extinguish a DPN
Bad company credit score – Again, as touched on above, the ATO will again be reporting tax debts of above $100,000 to credit reporting bureaus, and the implications of this action can be detrimental to a businesses ability to apply for and access credit. When an adverse event, such as having an overdue tax debt worth six-figures or more, is listed against your business by the ATO, this will show up on your credit report, and likely lower your business credit score.
Having a lower-than-average credit score may make it more challenging to gain approval for business loans, and other financial products, such as a credit card, or a hire purchase loan for yellow goods equipment. If you are able to source a lender willing to approve you for credit, it’s likely that due to your company being considered a more risky borrower, you’ll be charged a higher interest rate and greater fees than a business with an excellent credit score.
Risk of losing clients – Not only can a poor credit score hurt a businesses chances of gaining credit approval, but it can also influence whether a trading partner or a supplier will work with your business. In the current environment of volatile supply chains and risk of rising insolvencies, it’s a no-brainer that businesses are running credit reports on potential partner entities, to ensure it is likely to pay its invoices on time. If your business has a poor credit history and credit score, you may not secure these contracts.
Increased likelihood of insolvency – For many SMEs in Australia, the ATO withdrawing its financial support schemes, chasing your business up for late and non-payments, and hitting you with a DPN, can do more than hurt your bottom line. It’s likely that if one or more of the aforementioned challenges reach your business, you may find it necessary to declare insolvency, appoint external administration or consider restructuring.
As Australian businesses transition away from the darkest days of the pandemic, it’s likely there will be some initial teething problems. After all, many of the domestic and global impacts of COVID-19 are still being felt by Australian businesses.
For example, businesses in the hospitality sector may be struggling to maintain hours, source staff for venues and keep full menus – all of which are devastating to their ability to maintain cash flow. This is because supply chain delays, and the recent flooding events in New South Wales and Queensland, have hindered access to produce, and other materials, that Australian businesses rely on. Then, when inventory is found, it is often more expensive, thanks to rising inflation levels. Further, the ongoing skilled labour shortage makes finding and staffing venues just as challenging as sourcing food and beverages to serve. This hypothetical hospitality business could now be juggling all of this, plus devastating financial penalties, if it relied on ATO leniencies for relief from superannuation and GST payments.
In the event that your business begins to struggle, one of your best options to maintain operation and keep your head above water is to speak with an experienced advisor , like Myssy + Co. Our team of experts may assist in providing high-quality and all-inclusive support to ensure your company is secured. We can assist in offering effective alternative options to put the business in its best position when potentially facing extreme financial challenges. For example, it is recommended that shareholder and director loans are backed by a registered security interest. Furthermore, where external funds are needed to cover wages and other employee entitlements, your business can document it in a way that qualifies it as a section 560 loan.
These are just two standard practices that Myssy + Co can walk you through to ensure funds are placed in a higher priority of repayment in the event of a liquidation.
Avoid these financial challenges and engage with Myssy + Co
If you’re feeling overwhelmed with information, don’t panic. It’s not expected that business owners should be financial and taxation experts, and it’s not recommended that you go through the process of adjusting to these post-pandemic conditions alone.
Even if you’ve crunched the numbers, and believe that voluntary liquidation, restructure or administration are a likely path your business will walk in the next few months, there may be other options available to you.
This is where engaging with skilled and proactive advisers and accountants, like the team at Myssy + Co, can offer your business a lifeline in the current environment. Our team can assist your business in identifying tangible next steps following any of the aforementioned challenges laid out by the ATO changes.
You’ll also be provided with comprehensive information to assist in the preparation of this process, including:
- Ensuring compliance, as you’ll be looked at unfavourably if your lodgements aren’t up to date.
- Understanding the DPN process, including best steps to take upon receiving a Non-Lockdown DPN.
- Shareholder loan issues – Assistance in the process of paying back existing Div 7A shareholder loans.
- Payment of dividends without being clawed back.
Even if you are not experiencing difficulty now, a good advisor will be able to prevent a deterioration to your circumstances and put you in good stead for the future.
As a SME, Myssy + Co uniquely understands your specific needs, and how passionate you are about the continued operation of your business. In fact, we’ve experienced many of the same challenges and growth as your business, so we appreciate the taxation and financial implications that these latest ATO changes create. We want to see your business succeed almost as much as you do, so we established a philosophy of striving to give our clients the same service, and attention to detail, we would want to receive.
Further, we understand the financial challenges that these ATO changes can create for SMEs, in comparison to larger organisations. The pressure on your business is greater, and we know that the issues you face are considerably different to big businesses. This is why we strive to offer personalised services that are accessible to SMEs, just like yours.
Don’t put your head in the sand when it comes to the ATO’s shift to business as usual. Myssy + Co can advise you on your available options, recommend alternative government support schemes and grants, and even guide you successfully through the worst-case scenario of voluntary liquidation, if need be.
To discover the next steps your business should take to protect itself in this post-pandemic environment, contact our team of experts at Myssy + Co today.