NEWSLETTER | Payment arrangements with the ATO – A ‘two-edged sword’

Payment Arrangements with the ATO – A ‘two-edged sword’

The latest Annual Report from the Australian Taxation Office (ATO) indicates that small business accounts for the majority (around 62.4%) of all outstanding tax debts. Collection of small business tax debts is therefore a specific area of focus for the ATO.

Earlier this year, as part of a new early intervention approach, the ATO commenced writing to small businesses that had fallen behind with their tax payments outlining the available options to get the business ‘back on track’. One of these options is for the business to enter into a payment arrangement with the ATO – the payment of the tax debt by instalments.

To encourage this course of action, the ATO has simplified the process for entering into payment arrangements. For tax debts of less than $25,000 and where the taxpayer has a good taxation compliance history and can pay the tax debt by instalments within 2 years, a payment arrangement can be set up without the need to talk to a tax officer. The taxpayer simply needs to call the ATO’s automated self-help numbers and follow the prompts.

The process is more complicated for debts over $25,000 – and for taxpayers with than a less than perfect lodgment or compliance history. In such cases the ATO is likely to impose stricter conditions before agreeing to a payment arrangement. The ATO may require accounts and other financial information to assess business viability, there may be a requirement for an upfront payment and the ATO may insist on a direct debit facility to meet the instalments.

The advantages of entering into a payment arrangement with the ATO are obvious.

  • The pressure on the short term cash flow of the company is alleviated.
  • A payment arrangement provides the ATO with an alternative to more formal recovery procedures.
  • The ATO is precluded under law from commencing or pursuing proceedings to enforce a director penalty if a payment arrangement is in force and being complied with.
  • Although general interest charge (GIC) is payable on the unpaid debt from the original due date, under some circumstances the ATO will offer interest-free plans for activity statement debts for up to 12 months. Such plans may be available where the business has an annual turnover of less than $2 million and the activity statement debt is less than $50,000.

However, for some small businesses, extreme caution should be exercised when contemplating entering into a payment arrangement. The potential downsides may be less obvious.

  • A payment arrangement does not vary the time at which the tax debt is payable. GIC applies from the due date and continues to accrue while the debt remains outstanding.
  • A significant initial payment may be required. In many cases this can be up to 50% of the tax debt.
  • A condition of the payment arrangement is that all ongoing lodgment and payment requirements are met. Missing one repayment, or the late lodgment of a single return, will result in default under the arrangement.
  • If there is default, the ATO may take action to recover the whole of the outstanding debt without warning. Where the debt is comprised of outstanding PAYG(Withholding) or Superannuation Guarantee Charge, directors are personally liable for these amounts from the due date – although the ATO will first need to issue a director penalty notice to recover these debts from directors personally.
  • The statutory ‘moratorium’ of enforcement of a director penalty notice ceases on default under a payment arrangement.
  • Default under a payment arrangement may be the catalyst for the ATO to institute its ‘firmer action’ approach to debt collection – utilising its suite of recovery actions which may include taxation garnishees, director penalty notices or winding up proceedings.
  • Even if the payment arrangement is adhered to and successfully completed, with all instalments paid on time, there is still the possibility for directors to be subject to personal liability. If the company is subsequently liquidated, and the liquidator recovers some or all of the instalments from the ATO as unfair preferences (and these instalments represented unpaid PAYG(Withholding) or Superannuation Guarantee Charge estimates), the ATO can recover these payments from the director(s) personally – pursuant to a statutory indemnity under the Corporations Act.

A recent decision in the Federal Court also confirmed that the existence of a payment arrangement cannot be used as a defence to an insolvent trading claim against a director. A payment arrangement simply defers the tax debt. The debt remains ‘due and payable’ at all times. Of itself, a payment arrangement does not establish that the company was not insolvent at any given time.

Entry into a payment arrangement with the ATO can be a two-edged sword. It may be vital to overcome a company’s short term cash flow issues but default under the arrangement, or the subsequent liquidation of the company, may result in the imposition of personal liability on the director(s) that the entry into the arrangement was trying to avoid in the first place.

The very fact that the company needs to put in place such an arrangement signals alarm bells and can often be the last ‘roll of the dice’ by directors. The payment arrangement itself will be a factor considered by any subsequently appointed liquidator in assessing the company’s insolvency. From our experience as liquidators, we note that more often than not, companies in liquidation either have in place, or have had in place, a payment arrangement with the ATO.

Directors therefore need to exercise caution – it is necessary to carefully assess the company’s financial position before entering into a payment arrangement. Is the problem just short term cash flow? Or does the current problem suggest more long term or endemic insolvency issues?

Dean-Willcocks Advisory are insolvency specialists. We provide professional assessment and advice in relation to distressed companies. Contact our professional team for an obligation free initial consultation.

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