ATO’s ‘Direction to Pay’ power

“A Direction to Pay adds a criminal layer for super guarantee charge, and the director can be caught by it personally.

“I’d treat it as a trigger for urgent attention: an accurate solvency picture, documented decisions, and independent advice on the director’s own position.”

He emphasised that this Direction to Pay could lead to a personal liability for a director.

“The director and others involved in management can be taken to have committed that offence as well. Overnight, a cash flow problem becomes a personal one.

“So the instinct is to pay the ATO first, sometimes ahead of suppliers, wages and the lender. Directions and director penalty notices can arrive close together and get mixed up, so people chase the wrong deadline.

“And since Payday Super started on 1 July, super generally has to reach the fund within seven business days of each payday, so a business that’s behind can slip further.

“Used well, it forces an honest look at viability. Used badly, it’s just a bill to pay at any cost.”

For Richards, the power is fair as long as Parliament uses the power as intended.

“Unpaid super is unpaid wages. A business funding itself from its workers’ retirement savings has an unfair advantage over competitors who pay.

“The guardrails are sensible. Before a direction goes out, the Commissioner has to consider the employer’s compliance history, whether the amount is substantial for the size of the business, and any steps taken to pay or dispute it.”

Further, Richards said that the notice must allow at least 21 days to take action, explain the consequences and set out the review rights. 

“The employer can object, and the ATO can reduce the amount, extend the time or revoke it. There’s a defence for an employer who took all reasonable steps, both before the direction and before the deadline. 

“And the explanatory material said it was meant for serious contraventions by employers showing ongoing and intentional disregard of their obligations.”

Richards stressed that the Direction to Pay is a last resort by the ATO to drive a response where no other tactic has attracted a response.

“What we need to be careful of is that it doesn’t creep into being more of a mainstream tool. The safeguards should prevent this, but I’d hate to be witness to the safeguards failing and see the ATO use this tactic more prolifically.

“Where I’d be cautious is the business that’s genuinely out of cash. The threat of prosecution does not create money. And the employees it’s meant to protect can end up worse off if the business then falls over.”

Advising following a Direction to Pay

Richard said that accountants can proactively ensure that for their business clients, every payday super run is checked and the super is reaching the funds on time to mitigate risk of receiving a direction.

“If a client’s behind, tell them in writing that the director can be personally exposed under the director penalty regime, and that serious or persistent non-payment can lead to a direction.

“One of the most critical aspects of all of this is lodging on time. Even if they can’t pay, the lack of visibility and transparency to the ATO is the concern, and it’s why the ATO has additional powers.”

To tackle this, Richards stressed that lodgements must be kept up to date with a short-term cash flow next to the super position, or engagement with the ATO must happen early

“If there are cash flow issues after that, that’s a different scenario to manage. Failing to lodge is a more concerning behavioural problem.”

Enough time

Richards said that 21 days is enough time if the work starts on day one.

“Diarise the deadline and read the notice properly, including the review rights. If there’s a genuine error or a proper basis to object, raise it before the deadline, because the law ties the objection right to that period.

“Check whether a director penalty notice has gone out too, then test with a cash flow whether the company can pay and stay solvent. If it can’t, get insolvency and legal advice in quickly and keep a record of every step and decision, because the defence turns on reasonable steps.”

He stressed that accountants must ensure that they do not overextend past their role as an accountant; especially where insolvency is involved, legal professionals will be better placed to help with certain issues.

“Know where your role ends. Criminal exposure, directors’ duties and insolvency are legal questions. Your value is accurate numbers, early warning and getting the right people in early.

“Separately, if they can’t meet wages, super and tax as they fall due, that’s solvency, not bookkeeping. They need qualified advice while they still have options.”

No silver bullets

Richards emphasised that the insolvent trading safe harbour will not protect directors if the company fails to pay employee entitlements, which include super, or to meet its tax lodgment obligations, unless the failure is minor and isolated.

Further, he stressed that paying the ATO will not end the Direction to Pay.

“The director still has to act for the company as a whole, and if it is insolvent and later goes into liquidation, payments to any creditor, including the ATO, can in some circumstances be challenged by a liquidator.”