A recent sharp increase in corporate insolvencies, particularly in the SME sector, has (in part) been attributed to the Australian Taxation Office (ATO) taking a firmer approach to recovering outstanding tax debts.

As businesses begin to recover from the Global Financial Crisis, there has been a noticeable shift in the way the ATO is now dealing with companies with significant tax debts that are not being addressed.

Companies should be particularly aware of tax debts accumulating as a result of submitting Business Activity Statements (BAS) (such as unpaid GST or PAYG). While a number of businesses may have participated in the ATO's debt deferral program (which commenced on 1 June 2009), it appears the ATO has shifted to a stricter policy when dealing with taxpayers who fail to make a payment under an instalment plan or fail to meet new BAS liabilities as they arise.

This can result in the ATO electing to issue a statutory demand in respect of the whole tax debt, requiring full payment within 21 days. Failure to comply with a statutory demand can be used as evidence that a company is insolvent and is also grounds to have the company wound-up. Even though it may only be a single instalment payment that is missed, in less than four weeks a company can find itself the subject of a winding up application. While the company's future will be of immediate concern, another major concern is that when the debts relate to PAYG, the company directors can be made personally liable for company tax debts.

Precautionary measures

From our experience in acting for taxpayers in a number of winding up applications brought by the ATO, to avoid being wound-up, the following precautionary measures are imperative -

  • diligently adhering to payment plan timetables and liaising with the ATO if you encounter difficulties meeting your payment plan or ongoing tax liabilities;
  • acting quickly if you receive a statutory demand for payment and obtaining legal advice; and
  • presenting the ATO with a viable alternative to formal debt recovery proceedings by providing a clear plan as to how the company intends to meet existing and future tax liabilities (supported by documentation).

The recent increase in ATO debt recovery activity illustrates the need for companies carrying-over tax debts to be vigilant and to seek legal advice as soon as payment issues arise with the ATO.