When you cannot pay this quarter's tax: steps to protect your position

The choice that narrows options quickly

A quarterly BAS is due, payroll needs to go out and materials need to be paid. The tax office looks like the safest creditor to delay. The problem is that this choice compounds quickly.

Company directors have a statutory duty to ensure that their company meets its PAYG withholding, GST and superannuation guarantee charge obligations by the due date. If the company fails to pay by the due date, directors become personally liable for a penalty equal to the unpaid amount. That liability is created by operation of law as soon as the company misses the due date, though the ATO cannot recover it from you until 21 days after issuing a director penalty notice.

The practical distinction is whether you engage with the ATO before deadlines pass or wait until enforcement letters arrive. Early contact keeps more options open.

Source: ATO: Director penalties

What director penalty notices actually do

A director penalty notice makes a company director personally liable for the company's unpaid PAYG withholding, GST or superannuation guarantee charge. The notice starts a 21-day window in which directors must act to remit the penalty or face personal recovery action.

Remission options depend on whether the company reported the liability within three months of the due date. If the liability was reported within three months, directors can remit the penalty by ensuring the company pays in full, appoints an administrator or small business restructuring practitioner, or begins winding up.

If the liability was reported more than three months after the due date, or remains unreported, the penalty is locked down. For superannuation guarantee charge due on or after 1 July 2018, if the statement was not lodged by the due date, the only way to remit the director penalty is to pay the company liability in full. Entering administration or liquidation will not help.

Receiving a director penalty notice does not automatically lock in personal debt, but the remission window is short and options narrow quickly if reporting was late.

Source: ATO: Director penalties

Payment plans are not automatic

The ATO offers payment plans, but eligibility depends on the debt amount, lodgement history and past payment plan performance. Businesses owing $200,000 or less may be able to set up a plan through ATO online services or the self-help phone line. Debts above that threshold, or cases involving two or more payment plan defaults in the past 12 months, require direct contact with the ATO.

A payment plan does not stop general interest charge from accruing daily. The longer the plan, the more interest accumulates. Payment plans also require the business to continue lodging and paying future tax liabilities on time. Failure to meet those obligations can move the plan into default.

Interest-free payment plans may be available for small businesses with annual turnover under $2 million, recent activity statement debts of $50,000 or less overdue for up to 12 months, and a good lodgement and payment history. Eligibility also requires demonstrating ongoing viability and being unable to obtain finance through normal business channels.

Source: ATO: Setting up a payment plan

Garnishee notices and what they attach

A garnishee notice requires a third party holding money for the business to pay that money directly to the ATO instead. The ATO can issue garnishee notices to banks, customers who owe the business money, merchant card providers or solicitors holding settlement funds.

Before issuing a garnishee notice, the ATO typically sends a warning letter. Once issued, the third party is legally required to comply. For bank accounts, the notice can attach money held for or owed to the debtor. For ongoing accounts such as merchant facilities, the notice can remain in force until the debt is satisfied.

Garnishee notices can be varied or withdrawn if the business makes suitable alternative payment arrangements, but contact must be prompt after receiving notice.

Source: ATO: Garnishee notice

Statutory demands and wind-up proceedings

Where a company has failed to pay its debts and has not agreed to a suitable payment plan, the ATO may issue a statutory demand. Under the Corporations Act, the demand requires the company to pay the entire debt or to secure or compound for it to the creditor's reasonable satisfaction within 21 days.

If the company does not comply, the ATO may use the non-payment as evidence of insolvency and apply to the Federal Court to wind up the company. Wind-up proceedings result in the appointment of a liquidator who sells the company's assets and distributes the proceeds among creditors. The ATO considers this step where the company has failed to engage or repeatedly defaults on agreed arrangements.

Source: ATO: Legal action we may take

What to do now if you are already behind

Get the exact account position from your ATO online services or by contacting the ATO. Gather overdue lodgements, notices, existing payment arrangements and current bank statements. Separate confirmed cash receipts from uncertain customer payments.

Contact the ATO before the next notice escalates. Explain the position, ask what penalty relief or remission may be available in your circumstances, and confirm any deadline that applies. Businesses that engage early and propose realistic payment arrangements receive different treatment from those that stay silent.

If you are also dealing with unpaid customer invoices, review whether those accounts need separate recovery action rather than assuming the cash will arrive in time to solve the tax problem. If a director penalty notice has arrived, obtain advice the same day. The 21-day remission window does not restart.

Where the business cannot afford a realistic payment plan or is insolvent, get advice from a registered tax agent and, where insolvency is a concern, a qualified insolvency professional. Waiting until options have narrowed makes every outcome more expensive.