During COVID-19 the Federal Government implemented special pandemic laws that essentially prevented insolvency activity on Companies. The effect of these laws was that they protected many unviable companies and put them into a holding pattern whereby under normal conditions they would be seeking insolvency or restructuring support. This reduction in insolvency activity can be seen in statistics issued by ASIC clearly showing the drop in insolvency activity since the the introduction of COVID-19 support measures.
Now that these special laws that prevented insolvency action have come to an end, companies are no longer protected from debt recovery action from creditors including the Australian Taxation Office. Companies and businesses that have exhausted their cash reserves will start feeling the pressure. With the 2021 Income Tax Liability now becoming due, this will add to cash flow pressures. The sectors under pressure include hospitality as cash reserves were depleted during the lengthy lockdowns and building and construction, due to labour shortages and increase in costs on fixed-price contracts. Material Costs and Wages are expected to further increase as public infrastructure spending surges due to the Olympics etc, pushing the cost of materials and wages beyond manageable levels. Construction-industry insolvencies jumped nearly 40 per cent in the three months to December compared to the September quarter – and were up almost 30 per cent on a year earlier – the latest data from regulator ASIC shows
The Australian Taxation Office has already commenced debt recovery action issuing 52,319 letters to directors in March in respect to outstanding Tax debts owed by 45,000 companies. The letters essentially threatened that a Director Penalty Notice (DPN) will issue unless the Director takes swift action to address the outstanding tax liability by either payment of the debt or entering into a payment arrangement. The effect of the DPN is that unless appropriate action is taken within 21 days from issuance of the notice the Director will automatically become personally liable for the certain outstanding tax debts.
The ATO has commenced acting on its threat by issuing approximately 200 Director Penalty Notices per week and the ATO expects that this number will increase and the number of insolvencies to increase accordingly over the coming months as the economy normalises. As the DPN enables the ATO to commence recovery action of the outstanding tax debt from each company director if the debt isn't addressed within the 21 days from date of issuance, it is critical that directors don't ignore these notices and seek immediate professional assistance. With the expected tsunami of companies requiring professional assistance later this year, it is recommended that you seek assistance sooner rather than later.
If you do have outstanding tax liabilities you should immediately check your residential address that ASIC has on their database. The ATO will send DPNs to the address shown on ASIC records, not to your tax agent. If you have moved and haven't changed your address with ASIC you may already have been issued with a notice and not received it for that reason. Unfortunately, the fact that the DPN was sent to the wrong address is not a defence as the ATO only have to issue the notice to the address on the ASIC data base. So now is the time to check that ASIC has your correct address.
Please contact a member of the DiSavia team should you be experiencing cash flow difficulties and require assistance with dealing with all amounts owing to creditors including ATO debts.