Small businesses account for more than 60% of the total debt owing to the ATO. So if you’ve got a tax debt, you are definitely not alone.

But don’t make the mistake of ignoring a tax debt. It is not going to go away on its own. In fact there is no time limitation for the collection of tax so you must do something to deal with the issue as if you don’t, it is very likely the ATO will exercise its extreme powers and this could lead to company liquidation, bankruptcy and the loss of your personal assets.

This article will help you consider how to approach the ATO and how to best plead your case for an accommodation or compromise of your debt.

The ATO has Power and very Deep Pockets.

If you have a tax debt, you can’t afford to ignore it. The ATO has a number of significant powers and aggressive recovery measures that they will use against taxpayers who don’t or refuse to pay tax.

One possibility is for the ATO to raise a tax assessment, and immediately issue a garnishee.

A garnishee is a tool that directs a bank to withdraw funds from the taxpayers’ account and remit them to the ATO. A garnishee can also be used to direct a debtor to pay money to the ATO rather than you!

Personal Liability for Company Tax Debts

The tax department can also hold a director of personally liable for unpaid company debts – specifically unpaid PAYG and superannuation. They do this by issuing a Director Penalty Notice.

Normally, a director is not responsible for company debts unless a personal guarantee has been granted. However, where BAS returns are not made for more than 3 months past the due date for lodgement, a director becomes immediately personally liable for the unpaid & unreported PAYG and superannuation.

ATO Attitude to Recoveries

The ATO routinely pursues individuals into bankruptcy and companies into liquidation for outstanding tax debts.

In fact, historically, the ATO has been responsible for the most number of forced insolvency cases in Australia – so ignoring a tax debt is not an option.

During the Global Financial Crisis, the ATO assisted taxpayers by entering into payment arrangements over 2 years or more without any real documentation in support. In this way, the government carried many companies through the worst of the crisis.

Subsequently from about 2010 onwards, as things improved, the ATO would allow instalment agreements over a 12 month period, and sometimes a little longer, if the taxpayer could demonstrate by way of documentation, that the business could sustain such an arrangement as well as maintain its current tax obligations.

The rules for ATO compromises are contained in the Public Governance, Performance & Accountability Act 2013 and Law Administration Practice Statements.

These statements lay out the basic rationale for how the law and the discretionary powers to compromise are to be exercised.

Essentially, the ATO has the power to enter into an agreement if it is financially prudent to do so and if it enables the efficient collection of tax liabilities from those obliged to pay them.

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A taxpayer wishing to propose a compromise arrangement must fulfil the minimum requirements that follow:
  • The debt must not be in dispute.
  • The proposal must be in writing and supported by appropriate material that would explain how the compromise would be fulfilled.
  • The compromise must offer all the taxpayers net assets (with limited exceptions)
  • The Commissioner expects to be treated the same as other creditors. Proposals that prefer or prejudice the ATO will not be accepted

If the ATO is able to conclude a compromise is in the interests of good management or administrative common sense, and that the agreement leads to the most efficient way to collect taxation liabilities, it will be likely to reach a compromise.

What will swing the balance in favour or against a Compromise?

The ATO will exercise its discretion to allow or reject a compromise proposal based on taxpayer behaviour. In particular;

  1. The ATO will favour taxpayers who have acted early and not allowed a debt to become larger by ignoring it.
  2. The ATO prefers taxpayers who take the initiative. When there is a problem, do not hide or pretend the issue will resolve itself. It rarely does.
  3. The ATO will take into account a taxpayers’ payment and lodgement compliance history. If there has been an ongoing issue regarding non-lodgement, failure to pay regularly or honour commitments, it is unlikely an agreement will be made.
  4. The compromise must deliver a better return to the Commonwealth that would be obtained by any available recovery processes. There must be a positive advantage of substance to revenue for accepting a compromise.

In making compromise agreements, the ATO will be concerned not to be seen to condone anything that is detrimental to revenue generally or to be seen to be encouraging the proliferation of these types of agreements as being the normal way of dealing with tax debts.

No matter how difficult the financial situation, company insolvency or personal bankruptcy is not the only option. Liquidation is but one of a range of alternatives that director must consider for their own benefit before they make any formal appointment.