ATO Warning Letters & Some Common Sense Asset Protection Advice

The ATO recently took the extraordinary step of sending an estimated 30,000 to 50,000 warning letters to company directors. There were two types of warnings, that a director may receive a Director’s Penalty Notice (DPN) and that the ATO may report company taxation debts to credit reporting bureaux.

If you received one of these letters it is definitely time to look at a Plan B. This article will look at the issue of DPNs in detail and then discuss some common sense steps company directors and business owners can take now to manage their risks and protect their personal assets. The ATO have sent a warning, not a DPN, so company directors do have time to manage and consider their situation and protect their personal assets.

Where is the DPN sent?

The first thing to consider is that any DPN will be sent to the director’s residential address as per ASIC records.

If the ATO sends the DPN to the residential address recorded on ASIC, the DPN is deemed to have been received whether the director actually sees it or not. It is therefore vitally important that the address recorded with ASIC is correct and current.

What is the company director liable for?

Originally a DPN was only for PAYG but as of 1 April 2020 the DPN regime was expanded to include GST, WET and LCT. Of course, the big one is GST.  Since the outbreak of the pandemic the ATO has issued very few DPNs. When the ATO does start issuing DPNs they will include a GST component where applicable.

If the company director receives  a DPN – what does this really mean?

The answer depends on whether the debt that is the subject of the DPN has been reported within the prescribed timeframes, being within three months of the due date for PAYG, GST, LST and WET and by the due date for superannuation.

If taxation and superannuation obligations have not been reported within these timeframes, the penalty is a “lockdown” penalty, and the director can only avoid personal liability by having the company pay the outstanding amounts in full.

If the ATO debts have been reported within the prescribed timeframes, the director has the opportunity to remit their penalty by paying the debt or by placing the company into voluntary administration, liquidation or appointing a Small Business Restructuring Practitioner (SBRP) within 21 days of the date of the notice. That is not the date the director receives it – it is the date on the notice. This does not leave the director much time to consider their options and take the necessary action.

What are some common sense things company directors can do now to manage their risks?

If you received a warning letter you should take it seriously. This is an indication that the ATO will pursue debt recovery. ATO debt will not just go away and will need to be dealt with at some point.

Some common sense steps directors can take now to manage their personal risks in the future are;

• Always report your ATO debt (lodge your BAS statements) within the prescribed timeframes even if you cannot pay it. If tax obligations remain unreported it is more likely to prompt the ATO to act and could expose the director to a “lockdown DPN” as mentioned earlier.
• If you cannot pay your superannuation by the due date, lodge the Superannuation Guarantee form with the ATO on or before the due date.
• Communicate with the ATO if contacted or seek advice on options to deal with ATO debt. Generally, the ATO is open to payment plan arrangements, particularly for superannuation. If you consider the ATO debt insurmountable you should seek specialist advice now.
• Only have one director. Directors often have to personally guarantee lenders and creditors and are also exposed to risk under DPNs. Life partners should not both be directors. Shareholdings can be a better way of handling things. A well thought out Asset Protection Strategy can be hugely beneficial when managing business risk.
• Review Division 7a loans with your accountant or bookkeeper. Great for taxation management but you need to have a plan on how you will repay the loan. If anything happens to the company you may be called on to repay any loan you owe the company.
• Review related party debtor-creditor relationships. If anyone, such as a family member or related business entity, owes the company money and it has problems they will also be called on to repay their loan. Alternatively, if a family member is owed monies, registering a security on the Personal Property Securities Register (PPSR) can increase the priority for payment in an insolvency situation and obtain a much better result for the lender.
• Consider the use of asset holding entities. A company can own the assets, and even the goodwill, of a business and enter into an agreement for another company to operate the business using these assets. This separates assets from trading risk if used effectively.
• Understand who owns major family assets, such as the family home. A director exposed to risk can sell their equity in assets to a third party for fair market value.

In many cases loans can be settled for a fair, commercial amount. Arrangements can be made now to address Division 7a loans, even if time is needed. Business and personal assets can be sold to a third party, such as a life partner or related entity, as long as fair consideration is paid.  All these steps can help reduce and manage risk. Importantly if a director has no assets in their own name the risk of recovery action against them by trade creditors is reduced. Legal action costs money, and very few creditors will incur the expense unless they believe they will get a return.

Do you need advice from a pre-insolvency specialist?

Company directors and business owners should really take these steps now, even if they did not get an ATO warning letter. Nobody sets out to fail. Business owners are usually some of the most optimistic people in the world. Business owners actively manage risks in a number of areas already yet often ignore managing their own personal risks, leaving themselves and their personal or family assets exposed.

If you did get an ATO warning letter the important thing is to recognise that this problem is not going away and that a Plan B is needed now. Fair play to the ATO. Directors cannot say they have not been warned. What directors do now with the time they have been afforded could have a massive bearing on the outcome for them, their families and their businesses.