How to deal with overdue tax debts

Insights10 Feb 2021

By Scott Butler, Wayne Kelcey, Katherine Payne, David Dickens, Adrian Lasky, Hector West and Mark Petrucco

In the first of our series of articles on the avenues for small to medium businesses to deal with their overdue tax debts, we look at how and when tax liabilities arise and what options are available to the ATO to pursue them when overdue.

By Scott Butler

The ATO’s $34.1 billion of collectable debt

In October 2020 the Australian Taxation Office (ATO) reported that its collectable debt had risen to $34.1 billion, up from $26.6 billion the year before. Collectable debt is the ATO’s term for undisputed debt, meaning debt that is not subject to an objection, appeal or current insolvency administration.^[1]

The majority of collectable debt was owed by small business – $21.4 billion for small business, up from $16.5 billion the year before.^[2]

While the recent increase in collectable debt can be put down to COVID-19 tax payment deferrals, the pre COVID-19 levels show that businesses in Australia have been doing it tough for a number of years and have been using the ATO as a lender of last resort to fund their working capital.

Tax reporting obligations

Activity statements

Activity statements are required to be lodged to report and pay numerous tax obligations, including:

goods and services tax (GST);
pay as you go (PAYG) instalments; and
PAYG withholding.^[3]

A business activity statement (BAS) must be lodged and paid by businesses that are registered for GST. Businesses are required to lodge and pay BASs according to their GST reporting and payment cycle, which will be one of the following:

quarterly: if the business’ GST turnover is less than $20 million and the ATO has not told the business it must report monthly;
monthly: if the business’ GST turnover is $20 million or more; or
annually: if the business is voluntarily registered for GST and its GST turnover is under $75,000 (or $160,000 for not-for-profit bodies).^[4]

For BASs that are required to be lodged and paid quarterly, the due dates are as follows:

for the 1 July – 30 September quarter: 28 October;
for the 1 October – 31 December quarter: 28 February;
for the 1 January – 31 March quarter: 28 April; and
for the 1 April – 30 June quarter: 28 July.

If a business lodges online, it may be eligible for an extra two weeks to lodge and pay its quarterly BAS.

The due date for BASs that are to be lodged and paid monthly is the 21^st day of each month (eg a BAS for July is due on 21 August). For BASs that must be lodged and paid annually, the due date is 31 October, unless the business is not required to lodge a tax return, in which case the due date is 28 February following the annual tax period.^[5]

Income tax

Companies are required to lodge annual tax returns to report information, such as:

their taxable income;
their tax offsets and credits;
their PAYG instalments; and
the amount of tax they are liable to pay on their income or the amount that is refundable.^[6]

The due date to lodge an annual tax return and pay the required tax varies depending on the size of the company. The following are the due dates:

31 October: for the lodgment of income tax returns of all June balancing companies that did not lodge their previous financial year income tax return on time or had overdue tax returns as at 30 June of the previous financial year;
1 December: for the payment of income tax by large/medium companies (lodgment of the return is due 15 January) or the payment of income tax for companies whose tax return was due on 31 October; and
28 February: for the lodgment and payment of income tax for small companies.^[7]

Super

Each quarter, employers are required to pay eligible employees super guarantee (SG) on top of the employee’s wages. SG is currently at a rate of 9.5% of an employee’s ordinary time earnings, which is the amount an employee earns for their ordinary hours of work (including commissions, shift loadings and allowances, but not overtime payments).^[8]

On 1 July 2019, the ATO rolled out Single Touch Payroll (STP) to both small and large employers. With STP, each time an employer pays an employee through STP-enabled software, the ATO receives the employee’s payroll information (such as salaries and wages, PAYG withholding and super).^[9]

Payment of super into an employee’s super fund is due quarterly according to the following due dates:

for the 1 July – 30 September quarter: 28 October;
for the 1 October – 31 December quarter: 28 January;
for the 1 January – 31 March quarter: 28 April; and
for the 1 April – 30 June quarter: 28 July.^[10]

Failure to lodge or pay

Failure to lodge or pay a BAS or an annual tax return

If a company fails to lodge or pay a BAS or an annual tax return, the ATO will contact the company after the due date by SMS, messages in MyGov, letters or phone.

A prudent taxpayer will contact the ATO and notify them in advance if they expect to be unable to meet a lodgment or payment obligation. The ATO recognises that small businesses may experience short-term cash flow issues that prevent them from paying their tax debts on time. In such circumstances, payment arrangements are available.^[11]

The ATO may take stronger action if a company is unwilling to work with them in relation to a debt or lodgment obligation. Such action can include issuing a final notice or default assessment, selecting the company for audit or prosecuting the company for failure to lodge (which is a criminal offence).^[12] For failure to pay, stronger action can include issuing a garnishee notice, director penalty notice, or a statutory demand followed by a winding up application.^[13]

Failure to pay super

If an employer fails to pay the appropriate SG to the correct fund by the due date for payment, they will be liable to the ATO for the super guarantee charge (SGC), which is made up of:

SG shortfall amounts calculated on an employee’s salary or wages;
interest currently at a rate of 10% on the SG shortfall amounts; and
an administration fee of $20 per employee, per quarter.^[14]

An employer with an SGC liability must lodge and pay an SGC Statement (SGCS) with the ATO by the 28^th day of the month after the payment of super was due (ie for the July – September quarter, lodgment of an SGCS is due on 28 November). The ATO will only investigate an enquiry by an employee about unpaid super for a quarter once the employer’s due date for lodgment of an SGCS has passed.^[15] In addition to the SGC, the ATO may impose penalties against an employer.^[16]

In seeking compliance with SG and SGC payments, the ATO will tailor their approach according to if an employer:

actively engages with the ATO;
experiences difficulty meeting their SG obligations; or
is unwilling to meet their SG obligations.^[17]

If employers fail to engage promptly with the ATO or fail to take steps to resolve their SG discrepancy, the ATO may take action such as issuing a direction to pay SGC, a garnishee notice, a director penalty notice, or a statutory demand followed by a winding up application.^[18]