When is a Debt to the ATO Due and Payable

With the significant increase in debt collection activity by the Australian Taxation Office (ATO) in recent months, it is timely to consider some of the pitfalls negotiating a payment arrangement with the ATO might create.  By way of background, the ATO long term average for the filing of winding up applications is approximately ninety (90) applications per month.  In the last three (3) months the ATO has substantially increased its winding up applications to approximately 490 per month.  This is indicative of the tightening credit policy now being enforced by the ATO.

A recent decision, in a case in which Mike Smith was involved, dealt with the position of the director in respect of an insolvent trading case where a company had made payment arrangements with the ATO.

In this matter, Smith v Boné, in the matter of ACN 002 864 002 Pty Ltd (In Liquidation) (No 2) [2015] FCA389 (Petrolink), during the eight (8) year period prior to the date of liquidation, the company had made a total of 26 instalment arrangements with the ATO for payment of its debt to the ATO.  Only one (1) of these payment arrangements was honoured to completion.  Six (6) of these arrangements were made within the 2.5 year period immediately prior to the appointment of the Liquidator.

Date of the Debt

The judgment noted that a liability to the ATO is taken to have been incurred on the date shown as the “effective date” of the debit on the ATO’s Running Balance Account.

Arrangements

Section 255-15 of Schedule 1 of the Tax Administration Act, 1953 (Cth) (TAA) provides:

1. The Commissioner may ... permit you to pay an amount of a tax-related liability by instalments under an arrangement between you and the Commissioner;
2. The arrangement does not vary the time at which the amount is due and payable.

Section 255-10 of Schedule 1 of the TAA, in summary, states:

“ ... the ATO may vary the time a tax debt becomes due and payable.”

The Tax Payer

In dealing with the ATO, many corporate tax payers either directly or with the assistance of their advisors, enter into arrangements with the ATO to pay their outstanding debts by instalments (ie.  pursuant to Section 255-15 of Schedule 1 of the TAA).

While such an arrangement may assist in cashflow, without an agreement pursuant to Section 255-10 (as above), the whole debt to the ATO remains due and payable.

Insolvent Trading

The consequence of an arrangement with the ATO (pursuant to Section 255-15) in a liquidation scenario, is that as the ATO debt is still due and payable, the Liquidator may successfully argue that the Company was insolvent and remained insolvent from as far back as the date the arrangement with the ATO commenced ie. for a considerable time prior to the date of liquidation.  As such, the director may be liable to pay compensation for insolvent trading pursuant to Section 588M of the Corporations Act, 2001 (Cth) (the Act).

In the Petrolink matter, it was held that as the director was aware of the unpaid debts to the ATO, he had reasonable grounds to suspect that the Company was insolvent.  In this matter the deemed date of insolvency was eighteen (18) months before the Liquidator was appointed. 

As such, he had contravened Section 588G of the Act by failing to prevent the company from incurring further debts.

Including interest and costs, he was ordered to pay compensation of approximately $900,000.

Director’s Liability to ATO

Directors should also be aware that payments made to the ATO pursuant to a payment arrangement may in certain circumstances be clawed back by a liquidator (commonly known as a preference recovery) pursuant to Sections 588FE and 588FF of the Act.

Pursuant to Section 588FGA of the Act, the directors of a company indemnify the ATO if certain payments are set aside (eg. a Liquidator successfully recovers a preferential payment from the ATO in respect of PAYG and Superannuation Guarantee Charge payments).  Where the payment arrangement with the ATO includes amounts relating to PAYG, the person who was a director at the time the payments were made to the ATO, may be liable to the ATO for the amount that a Liquidator successfully expunged/clawed back from the ATO (Section 588FGA(2) and (4)).

There maybe defences available to the ATO’s indemnity claim against directors, such as reasonable grounds to suspect solvency, reliance on a competent person, etc. 

Claim for Offset

Section 553C of the Act, allows an offset for mutual dealings between an insolvent company and a debtor/creditor.

There is no set off where the debtor/creditor, is shown to have knowledge that the company is insolvent at the date of the transaction(s) for which an offset is claimed (Section 553C(2)).

In the Petrolink matter, from the date the director was deemed to have had knowledge of insolvency, he was not able to receive the benefit of any offset (to the compensation ordered), for any payments he may have personally made to the company or its creditors.  This includes the payment of a director penalty notice (DPN) to the ATO; a payment to the ATO pursuant to Section 588FGA, and/or the injection of funds to the Company by way of a loan.

Message

The message to directors and their advisors from this matter is if you are about to negotiate a payment arrangement with the ATO in respect to outstanding tax debts, you must satisfy yourself that the company is solvent, otherwise in the event that the company does not meet its obligations and is eventually wound up, the director is exposed to the possibility of being liable to compensate the company (and/or its creditors) for insolvent trading.

In addition, directors may also be exposed to an indemnity claim made by the ATO in the event a Liquidator seeks to recover a preferential payment from the ATO.