The ATO isn’t just talking tough any more. It’s actually liquidating businesses that are not paying their tax. And it’s taking action a lot faster.
So you can no longer afford to ignore letters from the ATO. Keeping your lodgements up to date, and start communicating early.
One of the biggest reasons tax debts mount up is BASs not being lodged. Non-lodgement means the businesses owner and the other partners or directors don’t know the size of the debt (or even that there is one). Unfortunately, when the lodgements are bought up to date, the amount owing is often much higher than originally thought. It’s much easier to deal with the debt when it’s smaller.
If tax lodgements are more than three months late, the company wall no longer protects the director and they become personally liable for the debt. So it’s always best to lodge BASs by the due date, even if they can’t be paid at the time.
Communication is vital. If you can’t pay the ATO, talk to them early. They’ll want a payment arrangement, but it will be one you should be able to meet while still paying your current BASs as they are due. For this reason, it’s best that the business’ accountants be involved to negotiate with the ATO and help determine a sustainable payment arrangement.
Sometimes a business is doing it tough and can’t make repayments the ATO will accept. Rather than agreeing to the ATO’s amount, it’s better to engage a good business advisor to work through strategies to increase the cash flow of your business so you can meet the ATO’s requirements.
The business advisor won’t always be able to turn the business around. The business may also be insolvent.
Rather than continuing the business and getting deeper in debt, it may be best to close the business and sell off the assets. You should discuss this possibility early to give yourself enough time to get the best outcome.
What happens next depends on how the business is structured. If it’s run as a sole trader or a partnership of individuals, the owners will need to make up any shortfall for the amount owing from their personal assets.
If it’s trading through a company, or a company as the corporate trustee of a trust, then the owners generally won’t have to make up the shortfall from their personal assets. However, there are exceptions:
- Debts to which the directors have provided personal guarantees, such as creditors and banks.
- Tax debts arising from forms (i.e. BASs and Compulsory Super) lodged more than three months late.
- Unpaid debts that arose when the directors were trading insolvently.
If the company needs to be wound up, it’s better for the business to initiate it so it has more control over the process.
The best defence against the ATO is to keep on the front foot. Know where your business is at financially. And if the picture is deteriorating, get good advice—the earlier the better.
Three questions to ask yourself:
- Are your BASs lodged on time?
- Do you know what sales you need to make each month to break even from a cash perspective? (Note: this differs from a profit breakeven).
- What are your strategies to increase your cash flow?
Peter Ambrosiussen is a partner of Ambrosiussen Accountants & Advisors www.ambrosiussen.com.au