Some very good friends of mine work for the ATO so I am keen to highlight that the above humorous pictorial reference to the Game of Thrones’ White Walkers should not be taken to bear any resemblance to any genuine ATO officers.
But if you listen to the insolvency industry spokespersons and review the current statistics for ATO debt action, it is clear that the ATO’s (still very alive) debt army is undoubtedly mobilising. From a debt collection perspective, winter is indeed coming. In March 2022 almost 30,000 notices were sent concerning tax debts in excess of $100,000 and over 52,000 DPN’s were issued.
And because the ATO has been necessarily very ‘hands off’ for the past two years it has been easy for company directors to become warm and comfortable by the Covid Government payments fire and even a little tipsy on the generous ATO debt arrangement terms. That risks them falling asleep with respect to the risks presented to their own personal liability.
This article provides a gentle shake on the shoulder and encouragement that they grab a strong coffee and review where they and their company genuinely sit.
The golden rule for avoiding personal liability as a director is not to allow the company to trade whilst insolvent. But the scratch and sniff test for solvency is now somewhat muddied by the Covid measures introduced to support companies through recent times and also now considered through the haze of an unusually patient ATO.
A director must however work on the assumption that the walkers will come, either second half of this year or in 2023. Sensible questions should be asked as to how the company will fare if it defaults on ATO payment arrangement obligations and then has those deferred terms revoked. I have seen that happen, and once prior payment terms are the subject of a default, getting a replacement deal becomes even harder.
The insolvency sector is awash with talk of zombie companies, which I note sits uncomfortably with my white walker ATO debt team analogy. But let us not get distracted by such details.
Because other risks for directors can arise from the onerous powers in the ATO’s hands to issue Director Penalty Notices. Word from the North is that the ATO will continue issuing DPNs in their thousands. It’s a clever negotiation strategy, as it either causes directors to focus their minds on the company’s financial position and take urgent steps to shore it up (which of course leads to tax being paid), or else pushes the Company into an early insolvency that the ATO did not have to pay to achieve. Either way, the ATO ticks at least one of its preferred boxes.
But the other major benefit - and the reason that the DPN is now very much the ATO’s plat du jour - is the capacity to make some of the company tax liabilities irrevocably the personal responsibility of the directors, being an excellent way of focusing their minds on resolving those debt problems.
Has the company become relaxed with the new friendly ATO and allowed its BAS filings to become overdue by more than three months? If so, the ATO gleefully issues a ‘lockdown’ DPN for all amounts outstanding relating to any very late BAS returns and the director loses even the ability to avoid personal liability for those debts by putting the company into voluntary liquidation within 21 days of the statutory demand. That horse has already well bolted. The same goes for any outstanding Superannuation payments. Because when you have DPNs in your armoury, not all tax debts are the same – and those amounts can be estimated and then enforced via lockdown DPNs if the returns have not been filed.
So if you are by now wide awake with discussion of those scary personal outcomes, what practical steps can be taken? A key suggestion is to do a specific health check of the company’s solvency from the perspective of director personal liabilities. Are there any company liabilities that give rise to personal risk that can perhaps be prioritised for payment? It is possible to direct the ATO to apply payments to specific tax debts and that can be a useful protective card to play.
Also consider whether the company’s solvency status is secure, or instead whether it is propped up by the current helpful economic measures which must, at some stage, cease to apply. If so, forward planning is important to avoid the company’s debt problems being simply passed to its Board.
And the above reviews must (and this is an important message) be undertaken with proper regard to a director’s duty to act, at all times, in the interests of the company. That would suggest that a director (or potentially directors acting together in their personal capacities) should consider themselves seeking legal advice on their own liability. Whilst it may be tempting to always put such professional advice expenses through the company, this is one occasion where you may be better served leaving the company credit card at home and instructing that advice be given just to you, as individuals.
And on that advice front – recognising that this sounds like a convenient advert for the insolvency advice services of Cove Legal – remember that a solicitor instructed to act for you as a director must, as a professional obligation, provide advice to you that is in your best interests, even if that advice is against their own interests, such as maximising legal fees. The same duty does not automatically arise with other industries. Identifying your options and a strategy should therefore wherever possible include a (good) lawyer acting for you, even if the implementation of what you decide to do requires the assistance of others, such as an insolvency practitioner.
Roger Blow is Practice Director at Cove Legal. He is a commercial litigator specialising in tax disputes, insolvency, defamation and the health sector.