ATO Debt Collection: What Businesses and Directors Need to Know
The ATO has adopted more aggressive tactics to recover outstanding tax debts. These measures can have serious consequences for businesses and company directors, particularly where debts are not addressed early.
Reporting Tax Debts to Credit Reporting Agencies
One of the ATO’s key collection strategies is reporting outstanding tax debts to credit reporting agencies. Once reported, these debts appear on your credit file and can significantly affect your ability to obtain finance from banks or other financial institutions.
Having an ATO debt recorded on your credit file may also increase the interest rates you are charged on loans, as lenders may view you as a higher-risk borrower compared to someone without an ATO-reported debt.
Director Penalty Notices and Personal Liability
Another tactic increasingly used by the ATO is the issuing of Director Penalty Notices (DPNs) for unpaid tax debts.
How Director Penalty Notices Work
A DPN gives company directors 21 days to either pay the outstanding debt in full or enter into an appropriate insolvency arrangement. If the directors fail to take action within this timeframe, the company’s tax debt is transferred to the directors personally.
All directors become jointly and severally liable for the outstanding ATO debt. Once a DPN has been issued, no amount of restructuring or asset protection can prevent the debt from becoming personally enforceable against the directors.
Company Wind-Up Action by the ATO
As a last resort, the ATO may apply to the courts to wind up a company.
Increase in Insolvency Applications
Prior to COVID, the ATO was winding up approximately 40 companies per week. By February 2024, this figure had increased significantly, with around 130 winding-up applications filed by the ATO in that month alone.
This highlights a dramatic shift in the ATO’s approach to collecting outstanding tax debts.
Options for Managing ATO Debt
While several strategies may be available, including small business restructuring, the most common approach is to apply for a payment arrangement with the ATO to repay the debt over time.
ATO Payment Arrangements
Payment arrangements have become more difficult to secure and typically require detailed information to be provided to the ATO. This may include monthly profit figures and evidence of the business’s capacity to repay the debt.
In most cases, the ATO allows repayment terms of between 18 and 24 months and requires all future tax liabilities to be paid in full and on time. The ATO general interest charge currently sits at 11.34%.
Refinancing ATO Debt Through Specialist Lenders
Some lenders now specialise in providing loans to refinance ATO debts on more favourable terms than those offered by the ATO.
Typical Lending Parameters
Common lending terms include:
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Loan-to-value ratios of up to 75% to 80% for loans up to $5 million
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Interest rates from 7.24% to 8.24%, depending on the loan amount and LVR
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Establishment fees ranging from 0% to 1.25%, depending on the lender
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Valuation fees charged at cost
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Loan terms of up to 25 years
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Interest-only periods of up to 5 years
Security and Eligibility Requirements
Security is required and can be provided by residential or commercial property, whether owner-occupied or investment property.
These loans are designed for self-employed applicants, and it is acceptable if a partner is on PAYG. No financial statements or notices of assessment are required. An accountant’s declaration confirming income for the 2024 financial year is sufficient.
The Loan Process
The process is relatively straightforward. A face-to-face or video meeting is held with a broker to assess the taxpayer’s situation. A credit-tested quote is then provided, including valuation details.
Once the loan application is submitted, the normal processing time is around five working days. After approval, the ATO debt is paid out and discharged.
Who This Strategy Works Best For
This approach is particularly suitable for taxpayers who:
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Have an existing ATO tax debt
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Want to repay the debt over a longer timeframe or at a lower interest rate
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Wish to avoid having an ATO default recorded on their credit file
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Have received a Director Penalty Notice and want to prevent the debt from becoming personally enforceable
Addressing ATO debt early is critical. With the ATO taking a firmer stance on debt recovery, seeking professional advice can help you understand your options and choose the most appropriate strategy for your situation.
If you wish to speak to someone about refinancing your ATO debt, please contact our office.
