ATO debt recovery efforts have led to a surge in DPNs. What SMEs need to know

In recent months, the Australian Taxation Office (ATO) has significantly increased its debt recovery activities, particularly targeting small and medium-sized businesses. This escalation shouldn’t come as a surprise, as the ATO has been forewarning this for some time. Despite these warnings, some companies will still be caught off guard and unable to manage their tax debts.

Rising director penalty notices (DPNs)

The ATO’s increased debt recovery activity has led to a surge in issuing Director Penalty Notices (DPNs) to business owners who still need to meet their tax obligations. Small business owners are hurting the most, accounting for $33 billion of a total debt of $50.2 billion. If not managed correctly, company directors could find themselves personally liable for the company’s tax debt. Business owners must understand the implications of DPNs and act promptly to address them. 

Trigger for increased ATO activity

Whereas the ATO showed some leniency during COVID-19 lockdowns, don’t expect that to continue now — it has signaled a more aggressive approach to debt recovery in 2024, stemming from a substantial increase in tax debts owed since the dark days of the pandemic. Small businesses account for the largest share of this total debt and often have less of a buffer to manage that debt, making it more critical to take action to keep their business operational. 

ATO’s courses of action

The ATO has been taking several courses of action, including issuing DPNs and notices of Intent to Disclose Business Debts where they can, and are, reporting debts of more than $100,000 to credit bureaus such as Illion, CreditorWatch and Equifax, which in turn will impact an organisation’s ability to secure lines of credit in future. It intends to issue up to 50,000 of these before the financial year is out. The ATO can also issue Garnishee Notices for debtors’ bank accounts. Moreover, it can do this without notice, which could have a knock-on effect on cash flow. It can also use Winding Up Applications where debts are not met. 

Critical considerations for businesses

Businesses at risk of receiving a DPN should promptly assess their tax history and address any outstanding debt or compliance concerns. If you need clarification, speak with your accountant. 

They should also ensure that their registered business details are current with ASIC and ATO.

If company directors suspect they can’t meet their debt obligations, they should contact an insolvency adviser, who can help them identify the next steps and the best course of action, which might include small business restructuring. The worst thing you can do is ignore any correspondence from the ATO. 

Preparing for challenges

While it’s been on the cards for some time, the ATO’s increase in debt recovery action coincides with tougher economic conditions for many companies, including growing operating costs and a slowing in consumer spending. Despite these challenges, businesses must respond to ATO demands promptly. 

It will no longer do to stick your head in the sand. Missed lodgement deadlines could spell the end of your business, and it’s critical to act as soon as you anticipate difficulty in meeting your obligations. 

If you foresee issues meeting your obligations, it is crucial to speak to a business restructuring advisor as soon as possible.

Business owners must educate themselves on the risks and implications of the ATO’s processes and ensure compliance. While the ATO’s Small Business—Lodgement Penalty Amnesty Program provided some relief against late lodgement penalties, it expired on December 31, and small businesses must now face their tax debt head-on. 

To avoid a DPN, small and medium-sized businesses in Australia must stay informed and proactive and seek professional guidance to navigate the evolving landscape of tax obligations and debt recovery initiated by the ATO.

Mitchell Ball is chief of insolvency operations and an ASIC registered liquidator at Mackay Goodwin.