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When it comes to taxes, failing to meet your obligations can lead to a host of financial and legal consequences. In Australia, the Australian Taxation Office (ATO) takes tax compliance seriously, and non-payment of taxes can result in a series of penalties, interest charges, and even legal action. It’s essential to understand the potential ramifications and seek tax advice in Melbourne from qualified accounting consultant  to navigate the complexities of the Australian tax system.

In this blog, we will be delving into the more serious consequences that can occur if the tax office’s initial attempts to retrieve your owed taxes are ignored. However, the ATO will begin with less serious consequences an only escalate if there are continuous attempts to be uncompliant. For more information about the less severe, but more common penalties – and how the ATO can provide support if you are unable to pay your taxes on time, check out Part 1 to this blog.

Which circumstance require the ATO to take stronger action?

The ATO dictates that they are ‘committed to supporting taxpayers who want to do the right thing’ and will not provide significant penalties to those who are willing to co-operate with them on debt recovery.

The ATO specifies that stronger action is required when people/ businesses and organisations:

‘Are unwilling to work with [the ATO]’

‘Repeatedly default on agreed payment plans ‘

‘don’t have the capacity to pay and don’t take steps to resolve their situation’. ‘

‘Have been subject to an audit where [they] detect deliberate avoidance and payment avoidance continues’.

‘Appear to be engaging in phoenix activities.’

Phoenix activity involves the deliberate liquidation of a financially distressed company to avoid paying on outstanding debts, followed by the creation of a new entity to continue the same or similar business, often leaving creditors unpaid. This practice is fraudulent and aims to escape financial obligations. The term “phoenix” implies the rebirth of a new entity from the ashes of the old and is illegal.

Director Penalty Notice

A Director Penalty Notice (DPN) is a legal notice issued by tax authorities, to a company director personally. They emphasise the personal responsibility of directors for the financial affairs of the company and are designed to prevent ‘phoenixing’.  It holds the director personally liable for certain unpaid tax liabilities of the company. The two main types of Director Penalty Notices in Australia are:

Non-Locked Down DPN: This type of notice is issued when a company has unpaid Pay-As-You-Go (PAYG) withholding amounts. The director can incur personal penalties equal to the unpaid PAYG withholding. However, they can avoid personal liability by paying the outstanding amount or placing the company into voluntary administration or liquidation within 21 days.

Locked Down DPN: Issued for unpaid Superannuation Guarantee Charge (SGC) liabilities. In this case, the director cannot avoid personal liability by placing the company into administration or liquidation after the notice is issued. The only way to avoid personal liability is by paying the outstanding amount.

Initiating legal action

As a last resort, the ATO can file a claim or summon with the relevant state or territory court for them to enact harsher penalties. Once the court approves the claim the ATO can begin imposing harsher penalties such as bankruptcy notices, creditors petitions, wind up action and the court can impose judgement debt interest.

If you are struggling with tax debt repayment, it is important to seek tax advice in Melbourne and receive qualified tax accountant  to begin debt repayments as soon as possible and avoid legal action.

Bankruptcy Proceedings

Bankruptcy is a legal status that declares an individual unable to meet their financial obligations. In the event of ATO-initiated bankruptcy proceedings, the entity receiving the notice is required to pay debt or make a payment plan within 21 days. If this is not followed, the ATO can file a creditor’s petition to make the entity bankrupt.

Being declared bankrupt has significant consequences, including the potential loss of assets, restrictions on financial activities, and a tarnished credit history. Bankrupt individuals are typically subject to a range of obligations and restrictions, and the process is designed to provide a structured means of debt resolution.

Creditor’s Petition & Wind-Up Action

A creditors’ petition is a legal action taken by creditors, including the ATO, to seek a court order declaring an individual bankrupt due to unpaid debts. Once declared bankrupt from a successful petition, a trustee will be appointed to manage your estate and pay back any creditors you owe money to. The manager can implement the sale of the individual, company, or entities assets to settle debts.

This can be avoided if the entity, business, or individual can demonstrate to the court they can immediately pay back any owing debts.

The absolute final resort for a business owing tax debts is ‘wind-up action’, where a court orders a company to finish business proceedings and appoints a liquidator to sell of all the company’s assets. This occurs when the company is deemed insolvent and unable to repay its creditors. The remaining funds will be distributed to all the creditors the company owes money to.

Do you need tax advice in Melbourne?

Centre of Wealth’s tax advice in Melbourne provides you with a qualified financial partner for everything tax related. From SMSF management to making sure your taxes are done correctly and on time, Centre of Wealth is a name you can trust for tax advice in Melbourne.

Receive tax advice in Melbourne today:

Get in contact with a member of our accounting consultant team today via the contact page on our website! Or call either of our Melbourne branches:

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