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.
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 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?
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