Much has been made of the recent spike in activity emerging from the Australian Taxation Office (ATO) in pursuing winding up action against small business debtors. That increased activity must serve as a warning to recalcitrant businesses.
However, whilst the payment of taxes on time and for the full amount is always good business practice, if you find your company in a position where there are tax arrears and you are contemplating making a payment arrangement with the ATO, there are some important things to consider.
First and foremost – is your company likely to be able to see the arrangement through? Good intentions don’t pay bills, so caution should be exercised in agreeing to a repayment plan that looks good up front, but can’t be supported through ongoing cash flow.
Secondly, if the arrangement is to be supported by borrowings, where are those monies coming from and who is making the payment? So often directors of companies experiencing financial difficulty will turn to friends or family for financial assistance, with the ensuing loans being provided to the company and then the company making payment to the ATO.
Each of these options have important implications for directors. Liquidators, once appointed to an insolvent company, will actively seek sources of recovery for creditors. One such source is often money paid to the ATO under a payment arrangement at a time when the company was already insolvent. Critically, any money repaid to the ATO that is recovered by a liquidator under such an arrangement can in turn be recovered against company directors by the ATO under a little known statutory indemnity that sits within the Corporations Act 2001 (sec. 588FGA) – see Young & Anor v Commissioner of Taxation  NSWSC 288.
Directors will often seek to defend such claims on the basis that the payment arrangement with the ATO meant that the due date for payment had changed, thus making the debt not ‘due and payable’.
Importantly, in the recent case of Smith v Boné, in the matter of ACN 002 864 002 Pty Ltd (in liq)  FCA 319, the Court held that the payment arrangements struck with the ATO did not mean that the payments were no longer “due and payable”. The effect of the payment arrangements was that the debt was merely deferred, but they remained “due and payable” at all times.
Obviously, seeking prompt quality advice is paramount.
Disclaimer: This column does not constitute advice. Readers should seek professional advice appropriate to their individual circumstances.
Tony is a Senior Manager at Vincents Chartered Accountants and provides specialist advice to clients in the areas of insolvency, business risk
and financial conflict and dispute resolution. For more information, contact
Vincents, Level 7, AMP Tower, 1 Hobart Pl, Canberra City.
T: 6274 3400 F:6274 3499 E: [email protected] W: www.vincents.com.au