Recent debt recovery work being undertaken by both the ATO and SRO.

Partner Catherine Ballantine and Associate John Miller from our Litigation and Insolvency Practice have prepared the below article to give you an overview of the process that the ATO and SRO are likely to follow in recovering outstanding tax liabilities from companies and how you can respond.

Over recent months, both the ATO & SRO have increasingly returned to their pre-pandemic levels of collection activities. The growing number of Winding Up Applications that are appearing on ASIC's published notices website suggests that the Deputy Commissioner of Taxation particularly is actively pursuing collection endeavours.

The ATO and SRO are serving statutory demands against companies and the ATO is serving director penalty notices against individual directors. Both are serious and need urgent action when received.

Statutory Demand

What is a statutory demand?

• A creditor’s statutory demand for payment of debt is issued pursuant to section 459E of the Corporations Act 2001.
• A statutory demand can only be issued for tax liabilities exceeding the statutory minimum, which is currently $4,000.
• The issuing of a statutory demand is the first step that the ATO or SRO will take so it can make an application to the Court to wind up a company.

How is a statutory demand from the ATO or SRO served?

• The ATO and SRO usually serve a statutory demand by ordinary post on the registered office of the company.
• It is therefore essential that companies have their current registered office up to date with the ATO, the SRO and on the ASIC register.
• It is very difficult, but not impossible to rebut the presumption of valid postal service and we can assist companies where service may be ineffective.
• If you use an accountant’s address as a company’s registered office, make sure you or your accountant has proper procedures in place for the receipt of mail and to provide you with a copy quickly so you can either:
  • deal with it in the 21 day timeframe; or
  • provide evidence to the Court that the document was not delivered.

What happens if you do not comply with a statutory demand?

• If the statutory demand is ignored or is failed to be complied with, the court may presume the company is insolvent, and the ATO or SRO may commence winding up proceedings against the company.
• It is therefore essential that the company immediately addresses the statutory demand within 21 days from the date of service.

What debts are likely included in a statutory demand from the ATO or SRO?

• The debt must be currently due and payable.
• The ATO is likely to issue a statutory demand where the debt exceeds $100,000 or the company has exhibited poor compliance behaviour (e.g. where there are no payments made for an extended period of time).
• Companies and their accounts need to be aware that the ATO will consider both the primary tax outstanding and amounts of the General Interest Charge (GIC) that has accrued on the primary debt when considering recovery proceeding. GIC can be substantial.
• The debts that the SRO will seek recovery of are often lower than the ATO minimum, and often relate to unpaid payroll tax, land tax or land transfer/mortgage duties.
• If the ATO or SRO are owed a number of debts, they may include them all in the one statutory demand.
• The ATO may also issue a Director Penalty Notice to the directors, if the company is under an obligation for unpaid PAYG withholding, superannuation and GST – this makes the directors personally liable for company debt.

How to respond to a statutory demand

• To avoid winding up action, one of the following steps must occur within 21 days of service of the statutory demand:
• the full amount demanded is paid;
• the company enters into a payment arrangement;
• the company brings Court proceedings to set aside the statutory demand; or
• the statutory demand is withdrawn in writing.
• It is very difficult to set aside statutory demands issued by the ATO by reason of the conclusive evidence provisions, which means that any amount on a notice of assessment is taken to be correct for recovery proceedings.[1]
• If a company successfully enters into a payment arrangement, or otherwise secures the debt, the ATO will agree to withdraw the statutory demand. It’s also open to a company to seek to negotiate the remission of interest and penalties when entering into a payment arrangement.
• Where there is an error with the amounts claimed in the statutory demand , we can request that the ATO or SRO withdraws the statutory demand. This does not mean that the statutory demand cannot be reissued.
• If the ATO or SRO refuse to withdraw the statutory demand, it remains possible to secure an undertaking from them that they will not seek to enforce the demand (for instance, when an assessment is under dispute or to allow time for the company to establish a payment arrangement).
• Our experience is that contacting the ATO via their 1300 number will not generally assist as the notices are not usually assigned a specific case manager. It is often time consuming to speak to the best placed person in the ATO to assist you.
• Speak to Madgwicks as promptly as possible, who can correspond with the ATO or SRO on your behalf and suggest and agree to proposed actions for repayment.

How to respond to a winding up order

• If the company has not taken steps to respond to a statutory demand, and the ATO or SRO makes an application to wind a company up, it can be very difficult to save the company without taking prompt action.
• Further, the ATO and SRO can still proceed to wind a company up even where the company has lodged an objection or has made an application to the Court or tribunal to review the underlying tax assessment.
• To prevent this from occurring, seek taxation or duty legal advice on the transaction or period(s) that the outstanding assessment is based on, and then seek a repayment plan on the reduced amount.
• Rebutting the presumption of insolvency can be an expensive exercise as a company has to prove its solvency.
• It’s also worth remembering that the ATO will actively resist a company contesting a matter in their defence of a winding up application where that matter ought to have been properly contested in an application to set aside statutory demand.

Director Penalty Notice

What is a Director Penalty Notice?

• In addition to commencing a winding up application against the company, the ATO may issue a director a director penalty notice (DPN) where the company is under an obligation to pay a GST instalment, withhold PAYG amounts or pay superannuation guarantee charge.
• There are three types of DPNs the ATO will issue:
  • Lockdown DPNs: where the company has failed to notify the Commissioner of its correct obligations (e.g. by failing to lodge a BAS) and has failed to pay its obligations;
  • Standard DPNs: where the company has correctly notified the Commissioner of its obligations for each period, however, has failed to pay its liabilities; or
  • A hybrid DPN: comprising of standard and lockdown components, which are based on the accuracy of the company’s lodgements.

How to respond to a Director Penalty Notice

• Director Penalty Notices (DPN) liabilities are complex and having the liabilities remitted will depend on your individual circumstances.
• If your company has outstanding liabilities subject to the DPN regime, or if you have received a DPN, please seek our immediate help as there may be steps that can be taken to avoid a DPN liability including:
  • winding up the company or having an administrator appointed (generally only available if the DPN is a standard DPN);
  • negotiate a payment arrangement for the company;
  • raising a defence, such as, where illness is a factor or you have taken all reasonable steps to cause the company to comply with its obligations; or
  • seek an indemnity or contribution from your fellow directors.

Prevention is better than cure

• Companies should keep their BAS lodgements up to date and report any superannuation guarantee shortfall within their statutory timeframes (which vary depending on a company’s size), even if the Company cannot pay the deficiency. This will protect a company’s director from a director personal liability if the company is placed into liquidation within 21 days of receiving a DPN.
• Companies that cannot pay their taxation or superannuation obligations should contact us immediately as the ATO will be less likely to issue a DPN where a company has engaged actively with the ATO early on to negotiate a compromise or payment arrangement.
• Accountants should take steps to ensure that they advise their clients, who are thinking of becoming a Company’s director, to undertake their due diligence to ensure that the Company’s lodgements and payments are up to date as they may become liable shortly after their appointment.

When to seek help

As early as possible.

Demands from the ATO/SRO are usually well-grounded and any of the options that might be available to you will need to be acted on quickly to mount a defence or agreement. Please contact Catherine Ballantyne or John Miller should you wish to discuss your own situation.

Accountants should also audit their clients to ensure that any company with a debt to the ATO or SRO is under a payment arrangement that is being complied with to dissuade ATO or SRO from issuing a DPN or statutory demand to the company.

[1] See section 350-10 of Schedule 1 to the Taxation Administration Act 1953 and Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd.