Business Advisory

Business taxation debts

B2B Editor1 July 2014

Business taxation debts

The recent further tightening of fiscal policy may see the ATO increase its activity level in the pursuit of business taxation debts.

Where a company is the debtor, the ATO may issue a statutory demand, under the Corporations Act 2001, in seeking to recover the outstanding amount. In addition, the ATO may also issue a Director Penalty Notice (“DPN”). Unless a director takes one of four steps within 21_days, namely:

* Pay the amount due;

* Enter into a formal payment agreement;

* Place the company into voluntary administration, pursuant to section 436A of the Corporations Act; or

* Place the company into voluntary liquidation, pursuant to section 491 of the Corporations Act. the director becomes personally liable for the debt of the company.

Different rules apply to debts that have not been notified to the ATO and are outstanding for more than 3 months.

Where directors chose to make payment in full or enter into a payment agreement, care should be taken to ensure that the arrangement is robust. In these circumstances the ability of the company to pay not only with the ATO, but all of its creditors is paramount.

The judgment Young & Anor v Commissioner of Taxation1 (Young) is significant for directors hoping to avoid a formal insolvency appointment by striking an arrangement with the ATO.

In Young, a former director of a company borrowed funds from a relative in order to repay debts due to the ATO. Those funds were recorded in the company’s records as a loan from the former director to the Company, despite those funds emanating from a relative in the first instance.

When a liquidator was appointed to the company, he commenced proceedings against the ATO for recovery of an unfair preference – all the money paid to the ATO within the 6 months prior to the winding up.

The Court found against the company and the transactions were therefore recoverable by the liquidator. However, the decision in Young is only half the story. The ATO enjoys a special right under the Corporations Act, allowing it to recover against directors any amount repaid to a liquidator as result of a recovered voidable transaction.

In Young, the director became exposed to a ‘repeat’ claim by the ATO upon the successful action by the liquidator, effectively paying the amount to the ATO twice.

Directors faced with similar circumstances should take urgent professional advice.

Endnotes 1 [2010] NSWSC 288

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