May and June 2015 have seen the largest number of Australian Taxation Office (“ATO”) winding up applications filed since August 2013, as the ATO continues its attempt to rein in its $19.5 Billion debt.
During his address to the Tax Institute on 19 March 2015, the Tax Commissioner, Mr Chris Jordan, stated that:
“we will be taking legal action earlier when warranted” and explained “this means initiating bankruptcy and wind up action where there is evidence that a tax payer is insolvent, and looking to use other statutory powers where business have failed to pay employee superannuation entitlements or pay amounts held in trust”.
It can only be assumed that the Commissioner was referring to using Director Penalty Notices and Garnishees, to seek recovery of the debt prior to, or in addition to, commencing bankruptcy or winding up action.
The ATO advised that historically it had allowed companies’ tax debts to reach sums on average of $340,000 before commencing winding up action and upwards of $300,000 for individuals. As part of its debt reduction strategies, these debt levels have been revised downwards to as low as $35,000 for company and personal debt.
The Commissioner’s comments were supported by a record number of winding up actions filed during the month of May 2015. Of the total 722 wind up applications filed, 556 were lodged by the ATO, surpassing the previous record of approximately 361 notices out of a total of 624 during August 2013.
The ATO’s tough approach has continued during the month of June 2015 with the ATO accounting for approximately 460 of the almost 630 winding up applications filed. Although this is down on the previous month, it is much higher than the ATO’s average of 92 per month since around 2009-2010.
So what warning signs are there that you may be at risk of receiving a winding up notice?
Leaving aside the obvious demand letters and telephone calls, prior to filing a winding up application for corporate entities, the ATO will typically serve the debtor with a “Creditors Statutory Demand” requiring the debtor to pay the debt within 21 days, following which, failure to comply results in a presumption of insolvency and allows the ATO to apply to the Court to wind up the company within a 3 month period.
The receipt of the Creditors Statutory Demand is generally a good indication that a winding up application will follow and advice should be taken without hesitation.
Other ATO recovery Action
In addition to the dramatic increase in winding up activity by the ATO, we have also seen an increase in the ATO’s tendency to issue Garnishee Notices and Director Penalty Notices.
Garnishee notices were discussed by Jackie Manning in our October 2014 newsletter. In short, where a person owes money to, or holds money for a debtor, the ATO can issue a Garnishee Notice to require the third party to pay that money directly to the ATO, in substitution to the debtor.
Garnishee Notices are typically issued to the debtor’s bank or on known trade debtors. More recently, we have noticed that a payment arrangement with the ATO does not appear to be of any protection to a debtor against the Garnishee Notice. It has been reported to us that the ATO is issuing Garnishee Notices during the term of payment arrangements despite strict compliance with the terms.
Director Penalty Notices
Company directors have a legal responsibility to ensure that their company meets its taxation obligations. A company director that fails to meet a Pay As You Go (“PAYG”) withholding liability or a Superannuation Guarantee Charge (“SGC”) liability in full by the due date, automatically becomes personally liable for a penalty equal to the unpaid amount.
When a PAYG withholding or a SGC liability remains outstanding, the ATO can issue a Director Penalty Notice to enable them to start legal proceedings to recover the penalty.
As the ATO is a significant driver of the current volume of insolvency appointments, it follows that the expected increase in debt recovery action by the ATO means tax payers who fall behind will no longer have the benefit of time before the ATO swoops.
We recommend that business advisers work closely with their clients, particularly those with unpaid taxes or employee entitlements, as they are the ones at high risk of personal liability to the ATO for unpaid taxation obligations and at risk of the ATO’s current winding up blitz.
Early intervention for clients is the key to resolving problems. It can also avoid or mitigate personal liability in some instances and enable the debt to be potentially managed rather than allowed to spiral out of control.
Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.