It might surprise you to hear that entering into a repayment arrangement with the Australian Tax Office (ATO) is not always the best decision for your business or for your personal liability as a Director.
Your company’s relationship with the ATO is often a key factor in determining insolvency outcomes and there are many nuances—both benefits and pitfalls—to be aware of before you take the plunge.
The ATO isn’t just another creditor.
The ATO is a significant player in the world of business insolvency, holding a massive influence over outcomes for business turnaround initiatives. 99% of all companies undergoing small business restructuring list the ATO as a creditor. In 91% of these cases, the ATO holds more than 50% of the total debt. During COVID-19, the ATO acted like Australia’s largest bank, providing unprecedented financial assistance to Australian businesses by way of accommodating repayment arrangements and other debt enforcement forbearance. But now, as repayments come due, the stakes for businesses have never been higher.
What Is an ATO Repayment Arrangement?
An ATO repayment arrangement is an agreement that lets a company repay tax debts in instalments when immediate payment isn’t feasible. Key features include:
- Flexible Payment Terms: The ATO can customise plans based on your financial situation.
- Eligibility Requirements: Companies must prove genuine financial hardship and maintain up-to-date tax reporting.
- Interest and Penalties: These may still accrue, though negotiations may lead to some relief.
However, entering into such an arrangement comes with serious legal and financial consequences that every director should understand.
What are the Hidden Risks?
One critical thing to understand is that entering into an ATO repayment arrangement doesn’t change the fact that tax debts are due and payable, or overdue and payable. Instead, the arrangement is a form of forbearance, meaning the ATO agrees to hold off on enforcement actions if the debtor complies with an agreed set of terms.
“Entering into a repayment plan is essentially an acknowledgment that your company might be insolvent. This admission carries weight legally and can have far-reaching consequences.”
If your company can’t meet the terms of the repayment plan and goes into liquidation, any payments made to the ATO within six months prior to commencement of the external administration could be considered preferential payments. These payments may be void and recovered by a liquidator. Perhaps more significantly, directors may be held personally liable to repay the ATO for monies recovered by a liquidator. Further, the ATO is actively issuing Director Penalty Notices to act as an effective personal guarantee of the obligations undertaken by a company in a repayment arrangement and has set out to enforce these obligations.
Only Enter into a Repayment Plan if you are Confident you can Comply
If your company defaults on a repayment arrangement, it can trigger personal liability. Essentially, directors could end up personally responsible for unpaid tax debts. Therefore, only if you’re confident your company can comply with the terms and come out as a compliant taxpayer, should you enter into one of these arrangements. Otherwise, the risk of breaching these arrangements could be devastating for your business and personal financial future.
There are Other Options
Repayment plans aren’t the only way forward. There are formal insolvency processes, like voluntary administration or small business restructuring, that could provide better outcomes for all stakeholders with reduced personal risk or exposure. At O’Brien Palmer, we are very experienced in this area and have various resources that can assist you. Take a look at our website pages for information on Small Business Restructures: https://obp.com.au/small-business-restructuring/
And our recent blog post on the Small Business Restructuring Process Update: https://obp.com.au/2024/09/18/the-small-business-restructuring-process-update/
Consulting with an experienced advisor is crucial before making a decision. At O’Brien Palmer, we’re always here to discuss your situation and help you make the right choice.
The Important Thing is to Take Action
If your business is struggling or if you’re unsure about your tax debt situation, don’t navigate this minefield alone. We’re happy to offer a no-obligation chat to explore your options. Get in touch with your accountant or us today to protect your future and make the most informed decision for your company.
Liam Bailey, Managing Partner
O’Brien Palmer
