In the fourth of our articles on dealing with the ATO about tax debts, we discuss entering into payment arrangements with the ATO.
The ATO has the power to permit taxpayers to pay their tax liabilities by instalments under payment arrangements, regardless of whether the liability has arisen or not. A payment arrangement does not vary the time at which the tax liability is due and payable. In Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy, the Full Court of the Federal Court confirmed that a payment arrangement does not cause a tax debt which was due and payable to cease to be due and payable. This is a relevant matter when considering whether the taxpayer is able to pay its debts as and when they become due and payable and is, therefore, solvent. Further, general interest charge will begin to accrue when the liability becomes due and payable and will continue to accrue on the balance owing under a repayment arrangement from time to time.
A taxpayer should apply for a payment arrangement prior to a due date. If the application cannot be made prior, then the taxpayer should apply as soon as possible after a due date. When making an application, the taxpayer should include:
- an initial payment to the extent of the taxpayer’s current capacity;
- reasons for non-payment by the due date;
- information to satisfy the ATO of the taxpayer’s inability to pay the full amount by the due date;
- information to satisfy the ATO that the taxpayer is treating their tax debts with the same priority as they are treating their other payment obligations;
- a detailed proposal for how they can pay their tax debt in full in the shortest possible time, including any additional charges for late payment and any reimbursement for costs the ATO has incurred in commencing any recovery action; and
- information to satisfy the ATO that payment can be made by instalments without the total debt escalating (that is, the taxpayer can meet its tax obligations which arise during the repayment arrangement period).
In deciding whether to grant a payment arrangement or not, the ATO will consider:
- information provided by the taxpayer;
- other information the ATO holds or has obtained;
- circumstances that led to the taxpayer’s inability to pay;
- the taxpayer’s current financial position, including if the taxpayer has taken any action to rearrange their finances or borrow to pay the debt;
- the stage that any legal recovery action has reached and the taxpayer’s reasons, if any, for why that recovery action should be deferred;
- the taxpayer’s offer and ability to meet the terms of the offer without seriously impacting the taxpayer’s ability to meet other obligations;
- whether a payment arrangement creates a likely risk to revenue and whether the risk could be overcome by some form of security from the taxpayer;
- the taxpayer’s solvency and arrangements with other creditors, both at arm’s length and not, to pay debts;
- the taxpayer’s compliance with other taxation obligations or commitments;
- the taxpayer’s prior dealings with the ATO;
- any alternative collection options that may result in payment in a shorter time;
- the taxpayer’s willingness to enter into direct debit arrangements, if possible; and
- the taxpayer’s willingness to accept the ATO’s conditions in relation to the payment arrangement.
The ATO may ask for security to secure the payments owing under the payment arrangement. In determining whether to require security from the taxpayer, the ATO will consider:
- the amount of the debt;
- the nature of the security offered;
- if the security is from a third party, the solvency of that third party and whether it is fair and reasonable to take the security;
- the value of the security compared to the amount of the debt;
- the period of time the debt has been outstanding;
- the taxpayer’s compliance history;
- the taxpayer’s ability to pay the debt;
- the taxpayer’s other liabilities; and
- arrangements made by the taxpayer’s other creditors to secure their debts.
The ATO prefers the following types of security:
- a registered first mortgage over freehold property, either from the taxpayer or a third party;
- a registered second or subsequent mortgage over freehold property, either from the taxpayer or a third party, so long as there is sufficient equity in the property to secure the tax debt after the prior mortgagees; or
- an unconditional bank guarantee from an Australian bank that is acceptable to the ATO.
Generally, the ATO will not agree to payment arrangements longer than one financial year due to taxpayers being expected to finalise their debt by instalments in the shortest possible time. However, the ATO has acknowledged that in some circumstances taxpayers will require longer than one financial year, such as because of their ability to pay, the size of the debt and the likely costs of alternative collection activity. Where a payment arrangement is longer, it will be reviewed regularly to take into account any changes in the taxpayer’s financial position and it is more likely that the taxpayer will be required to provide security.
The ATO may agree to enter into a payment arrangement after a statutory demand has been served or even after a winding up application has been filed; however, it becomes materially more difficult to convince the ATO to do so once a winding up application has been filed.
The ATO may terminate a payment arrangement and commence or continue action to recover the whole of the outstanding debt if:
- the information the taxpayer has provided and upon which the ATO decided to allow a payment arrangement is established to be false or misleading;
- the taxpayer fails to pay the required instalments;
- the taxpayer fails to comply with subsequent lodgment and payment obligations; and/or
- the taxpayer’s circumstances change and the ATO’s view is that the payment arrangement should be terminated rather than varied.
Repayment arrangements and the safe harbour against insolvent trading
Directors of a company that is subject to a payment arrangement which includes unpaid SGC amounts are unlikely to be able to rely on the safe harbour against insolvent trading. To be able to qualify for the safe harbour, a company must ‘pay the entitlements of its employees by the time they fall due’, including superannuation entitlements.
An SGC amount only arises if the company has failed to pay the required super contributions to its employees by the due date. Given a repayment arrangement does not cause a tax debt which was due and payable to cease to be due and payable, a payment arrangement with the ATO that includes SGC amounts would, in effect, mean the company must have failed to pay the entitlements of its employees by the time they fell due and those amounts remain due and payable (until paid under the repayment arrangement). For that reason, a company with a payment arrangement with the ATO that includes SGC amounts would not qualify for its directors to be able to obtain the safe harbour from insolvent trading.