No one likes receiving a letter from the taxman, especially if you’re struggling with unpaid tax debt. However, as the Australian Taxation Office (ATO) continues its ramped-up collection efforts, ATO notices to businesses are increasing.
In April 2022, as many as 52,319 ATO notices or warning letters (blue, orange and red) were sent to directors of companies with outstanding debts on PAYG, the superannuation guarantee charges and GST.
As a result of this, approximately 30-40 director penalty notices were being dispatched every day. Plus, the ATO has begun referring taxpayers to credit agencies and recommenced company wind up action in the courts.
If you’ve received ATO notices in the mail or are worried you might be getting one imminently, don’t panic. We’ve broken down what each letter means and what you need to do to avoid any distressing consequences.
You've Received a Blue ATO Notice
A blue letter from the ATO is an initial communication to let you know that you’re required to take action and lodge your tax return and pay your debt. The letter will provide information on what you need to do.
What you need to do
If you receive a blue letter from the ATO, don’t ignore it. Make sure you lodge your return and pay your debt as soon as possible. Even if you can’t pay the money owed right now as your business is struggling, it’s still important to lodge.
You should also call the ATO to explain your situation and look to set up an ATO payment plan. If you can’t afford a payment plan, contact a debt specialist.
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You've Received an Orange ATO Notice
If you fail to respond to the blue letter, you’ll be sent an orange letter. An orange letter from the ATO warns of the potential consequences of not lodging your return and paying your debt.
These consequences include:
- Penalties for overdue years
- Raising default assessments for each year of non-lodgement with penalties up to 75%
- Issue of a notice of non-compliance/disqualifying the trustee
The letter also warns that unless you make an effort to manage your debts within 28 days, they will disclose your debt to credit reporting bureaus (CBRs). If you do get reported to a CRB, your business’s credit score will be negatively impacted.
What you need to do
If you receive an orange letter as you still haven’t lodged a return or paid, make sure you lodge straight away and follow the same advice as above.
You've Received a Red ATO Notice
A red ATO warning letter is the final communication they send out before taking legal and debt recovery action against you.
It’s essentially a ‘show of cause’ letter instructing you to tell them why you shouldn't be subject to any of the penalties outlined in the orange letter.
What you need to do
If you receive a red letter as you still haven’t lodged, make sure you lodge and pay immediately and follow the same advice as above. Don’t put it off any longer!
Blue, orange and red ATO letters are often described as a ‘Three strikes and you’re out’ approach. They begin as a friendly reminder to pay and escalate to warning you that you need to take action immediately or face more serious consequences.
You've Received a Director Penalty Notice (DPN)
An ATO director penalty notice is a tax enforcement tool issued to a director if you haven’t met your obligations. If you receive a DPN, you can be made personally liable for your company’s debts if you don’t act within 21 days.
Even if you’ve only been recently appointed as director, you can still be held liable for historical liabilities if they’re not paid within three months of your appointment.
There are two types of DPN:
- Non-lockdown DPN – Issued where your tax debt is unpaid but reported within three months of the due date. You have three options at this point:
- Pay the amount in full or negotiate a payment plan
- Appoint a voluntary administrator
- Place your company into liquidation
- Lockdown DPN – Issued where your tax debt is unpaid and unreported within three months of the due date. You only have one option: Pay your debt in full to avoid personal liability
- Pay your debt in full to avoid personal liability
What you need to do
If you’ve received a director penalty notice, you need to make sure you take one of your available options within the 21 days. Alternatively, you could file for a defence if illness prevented you from being involved with company management or you took reasonable steps to comply with your obligations.
If you ignore a DPN, the ATO may begin court proceedings against you personally. This can put you and your family, as well as your business, in serious financial trouble.
If you’re struggling to make ends meet right now, paying off the minimum on your debts may be all you can afford to do, especially as the costs of living keep rising. In this case, focusing on paying off your debt, or at least a large chunk of your debt may be your only option or the best option.
You've Received a Copy of a Garnishee Notice
A garnishee notice is a legal order issued by the ATO to a third party that holds your money on your behalf or owes you money, including:
- Financial accounts, e.g. your bank
- Tax refunds/credits
- Employer
- Accountant
- Trade debtors
- Contractors
- Superannuation
The notice orders them to pay your tax debts from the amount they hold in your name. You receive a copy of the garnishee notice after it’s been issued.
There are two types of garnishee notices: a one-off or point or time garnishee and an ongoing notice or standard garnishee.
What you need to do
If you receive a copy of a garnishee notice, you need to act fast.
By the time you get it, your bank or other money holders may have already acted on it and sent your money to the ATO.
If they haven’t, you need to work quickly. This means checking to see if the garnishee notice is valid and calling the ATO to negotiate a withdrawal of the notice. If this is the first you’ve heard from the ATO about an outstanding tax debt, there could be an error. If this is the case, contact a tax lawyer for advice.
If you don’t act, your money will be accessed, and the ATO is serious about your tax debt and on its way to taking legal action. It could also leave your business struggling further as cash flow and resources are blocked.
You've Received a Statutory Demand
A statutory demand is a formal request from the ATO to pay your debts within 21 days of receiving the letter. It’s a legal document issued under S459E of the Corporations Act.
A statutory demand includes:
- Amount of debt owing
- 21-day payment terms
- Your name and registered ATO office
- Information on where you can pay
- Supporting document (Judgement of the Court or an affidavit)
What you need to do
If you receive a statutory demand from the ATO, firstly, act quickly but don’t panic. Any form of legal document is intimidating, but no action will be taken if you act immediately. . This means paying your debt or setting up a payment plan within the 21 days.
If you can’t pay your debt, you should immediately seek assistance from a restructuring and insolvency professional and seek to implement a solution before the 21 days expire, to give your business the best chance of survival.
If you fail to pay or start paying your debt, your company will be presumed insolvent under the Corporations Act. From the day after the 21 days, the ATO can apply to Court to start winding up procedures. It’s important to note that once a court winding up application has been issued, you cannot appoint a liquidator voluntarily, and your ability to voluntarily appoint a restructuring practitioner or voluntary administrator is severely limited.
If you receive a statutory demand but believe there is a ‘defect’ or genuine dispute in the demand, you can engage a solicitor to apply to the Court to seek that it be set aside.
Take action or seek help!
If you’re struggling with unpaid tax debt and receive one or more of the ATO notices above, taking action immediately, really is the key.
The longer you wait to seek help or avoid it, hoping you’ll catch up, the worse the pressure and consequences will become. Worst case, your business will be forced to wind up.
While the ATO has had to become more forceful in its approach to tax debt collection, it's still sympathetic to businesses in difficult circumstances. Speaking with them and negotiating an ATO payment plan or undertaking a restructuring is the best way to ease the pressure and the mental stress.
Make sure you’re suitably prepared for these negotiations. Also, address the debt in full, and ensure you can afford what you say you can.
If your situation feels too overwhelming in the face of ATO notices, don’t be afraid to seek professional help. We specialise in negotiating with and achieving great outcomes with the ATO and are here to help you take back control.
Have unpaid tax debts or ATO notices got you worried? See how we can help with our Instant Online Assessment, or get in touch with our team of ATO debt solution specialists today on 1800 861 247 for professional, non-judgemental support, advice and intervention.
