Owing tax debt to the ATO can be a serious issue for businesses. Whether you’re a director of a company or a sole trader, ignoring tax debts can come with consequences such as added interest, penalties, fines and potential litigation.
As a director, you can also be held personally liable for your company’s unpaid tax debts, so it’s important to understand the options to avoid the consequences of failure to pay.
How Does a Business Incur ATO Debt?
Most transactions undertaken in business have some tax implications so knowing your tax obligations is a major part of operating a business. It is also important that you understand your lodgment requirements including activity statements and tax returns to ensure that you don’t incur late lodgment fees and interest for unpaid debts.
Common sources of tax debt for businesses include:
- GST – unpaid amounts from Business Activity Statements (BAS)
- PAYG withholding – tax withheld from employee wages that hasn’t been remitted to the ATO
- Superannuation Guarantee Charge (SGC) – unpaid compulsory super contributions, which attract significant additional penalties if not paid on time
- Income tax – underpayments or unpaid assessments for companies and sole traders
In many cases, businesses begin accumulating ATO debt during periods of cash flow pressure when they defer tax obligations to keep operating. This can quickly compound through interest and penalties if left unaddressed.
What Are the Consequences of Failing to Pay?
There are a number of consequences if you fail to lodge your activity statements and tax returns on time or make the necessary payments. To help recover the outstanding debt, the tax office can issue garnishee notices on bank accounts and debtors, and also issue director penalty notices.
General Interest Charge (GIC)
When you don’t pay a tax debt on time, the ATO automatically adds the General Interest Charge (GIC) to the amount owed. GIC compounds daily on the outstanding balance and is updated quarterly.
Failure to Lodge Penalties
Separate from interest, the ATO can impose Failure to Lodge (FTL) penalties for missing lodgment deadlines on BAS, tax returns, and other required statements. These penalties accumulate over time the longer lodgments remain outstanding.
Referral to External Collection Agencies
If you don’t respond to ATO contact about an outstanding debt, the ATO may refer your account to an external collection agency. You will receive a pre-referral warning letter before this occurs.
Credit Reporting
Businesses with an ABN can have their tax debt reported to registered credit reporting bureaus if:
- The outstanding debt is $100,000 or more
- The debt has been overdue for more than 90 days
- You are not actively engaging with the ATO to manage the debt
The ATO must issue a written Notice of Intent at least 28 days before making any disclosure, and businesses that enter into a payment arrangement and comply with its terms will not have their debt reported. A disclosed debt can affect your ability to secure finance, and some suppliers may require cash on delivery.
Legal Action
As a last resort, the ATO can commence legal proceedings to recover unpaid tax debts. This can include winding-up proceedings for companies or bankruptcy proceedings for individuals and sole traders. The ATO has significantly increased its enforcement activity since 2023, moving away from the leniency applied during the COVID-19 pandemic.
What is a Garnishee Notice?
A garnishee notice is a direction issued by the tax office to any third party who owes money to a taxpayer or who holds funds on behalf of the taxpayer. Usually, the ATO would issue a garnishee notice to a taxpayer’s bank seeking payment of funds held in the bank account to the tax office to reduce outstanding tax debts. The third party (in this case, the bank) is legally obligated to pay those funds to the ATO to comply with the notice.
Garnishee notices can also be issued to debtors who owe money to your business, or to other third parties holding funds on your behalf. The ATO does not require a court order to issue a garnishee notice. Notices are typically issued after earlier contact attempts have been ignored or payment arrangements have not been made.
What is a Director Penalty Notice (DPN)?
Directors are required to ensure companies meet their Superannuation and tax liabilities. A DPN can be issued by the ATO to a director based on a company’s failure to meet these requirements and allows the tax office to recover unpaid superannuation and tax debts from a director personally.
There are two types of Director Penalty Notices, and knowing the difference helps you understand which options are available.
Non-Lockdown DPN (Standard DPN)
A non-lockdown DPN is issued when the company has lodged its tax and superannuation statements within the required timeframes, but the amounts remain unpaid. Upon receiving a non-lockdown DPN, a director has 21 days from the date of the notice to take one of the following actions to avoid personal liability:
- Pay the debt in full
- Appoint a voluntary administrator to the company
- Appoint a small business restructuring practitioner
- Appoint a liquidator (place the company into winding up)
If one of these actions is taken within 21 days, the director’s personal liability is remitted. If no action is taken, the DPN converts to a lockdown DPN.
Lockdown DPN
A lockdown DPN is issued when the company has unpaid debts and fails to lodge its BAS, IAS, or SGC statements within the required timeframes. Unlike a non-lockdown DPN, appointing an administrator or liquidator does not remove a director’s personal liability under a lockdown DPN. The only way to remit the penalty is to pay the debt in full.
DPN’s issued by the ATO can be satisfied by a director in the following circumstances:
GST & PAYG Debts
Scenario | DPN Type | Options to remit personal liability |
|---|---|---|
BAS/IAS lodged within 3 months of due date, debt unpaid | Non-lockdown | Pay in full, appoint administrator, restructuring practitioner, or liquidator within 21 days |
BAS/IAS lodged more than 3 months after due date | Lockdown | Pay the debt in full |
BAS/IAS never lodged (ATO estimation applies) | Lockdown | Pay the debt in full |
Superannuation Debts
Scenario | DPN Type | Options to remit personal liability |
|---|---|---|
SGC statement lodged by due date, SGC unpaid | Non-lockdown | Pay in full, appoint administrator, restructuring practitioner, or liquidator within 21 days |
SGC statement lodged late (after due date) | Lockdown | Pay the debt in full |
SGC statement never lodged | Lockdown | Pay the debt in full |
How Does a Business Address ATO Debt?
Entering into a payment arrangement is an option to pay off your tax debts, however it’s important to engage early with the ATO to ensure you deal with this as quickly as possible.
There are alternative arrangements to pay off your tax debts, so don’t be afraid to seek some advice on the options you have available to deal with these debts.
Seek Advice Early
If you’re aware of a tax debt or are struggling to meet your ATO obligations, contact your accountant, tax agent, or an insolvency adviser as soon as possible.
The options available to you narrow significantly once the ATO moves to enforcement action, and early engagement gives you the best chance of resolving the debt on manageable terms.
SV Partners has experience working with business owners and directors facing ATO debt across a range of circumstances. If you’re concerned about your position, contact us for a confidential, obligation-free consultation.