Early Action is Essential to Avoid Liquidation or Bankruptcy
In the 13/14 financial year, tax debt owing to the ATO reached $20 billion, the large majority of which (60%) is owed by small business (SME).
This situation has resulted in the ATO recently taking a much stronger approach to debt collection against SME companies and individuals, in particular the use of legal recovery action (commenced, for example, by the ATO issuing a Creditor’s Statutory Demand), and which action often results in the liquidation of the SME company, or the bankruptcy the SME individual, owing the debt. In addition, the ATO has increased the use of other powerful debt recovery tools at its disposal, such as garnishee notices and director penalty notices.
With a very high percentage of SME failure attributed already to poor cash flow, the fact that the ATO has now committed to a more aggressive debt recovery approach for unpaid tax liabilities makes it absolutely essential that SME’s have good practices in place to ensure cash flow, and promptly obtain appropriate and experienced legal advice should the SME find itself in a potential insolvency position or be the subject of debt recovery action by the ATO (or any other creditor).
Some tips for improving an SME’s cash flow position, and which will help to keep the ATO at bay, are:
- Having a properly drafted and up-to-date written Credit Policy and Terms of Trade – this will ensure all customers understand what is required and what you can do in the event of non-payment – director personal guarantees and security are essential.
- Having a clear internal Aged Receivables/Debt Recovery policy – and it needs to be followed strictly by all staff – it will include emails, phone calls and letters once the customer is outside your trading terms.
- Ensuring any Security granted to you is properly Registered on the Personal Property Securities Register – if it is not, it will be worthless when you come to rely on it.
- Should you need to retain lawyers to institute legal Debt Recovery action, then do so as early as possible and attack the recovery as aggressively as possible – where your customer is in financial difficulty, a softly, softly approach will only place you at the back of the queue if liquidators are appointed to the customer.
Some tips for dealing with the ATO in respect to tax liabilities:
- DO NOT ignore letters from the ATO – obtain prompt legal advice if you don’t understand what is required, or can’t do what the ATO is demanding – often strict timelines apply which will result in serious legal consequences if not complied with.
- Keep lodgments up to date and on time, even if they can’t be paid (otherwise the Directors will potentially be exposed to ATO director penalty notices).
- If you are experiencing payment difficulty, contact the ATO and arrange a payment plan – early communication is very important.
- Do not agree to a payment plan with the ATO you cannot afford to pay – it will simply mean you will find it much harder (and more likely impossible given the ATO’s present approach to outstanding tax debts) to negotiate with the ATO in the future.
In some circumstances, no matter how hard an SME may be trying to fix its cash flow/debt position, the reality is that the SME is insolvent. In such a situation, there is no point in the SME continuing on, getting deeper into debt (with the ATO or and other credit/funding provider), and thereby exposing the SME directors or individuals to potential breaches of the law (such as insolvent trading). The best course is to obtain early specialist and experienced legal advice as to the insolvency options available to the SME.
For further information and advice in relation to any of the above, please contact our specialist Insolvency, Dispute Resolution and Litigation Team Craig Shepherd or Anneliese Seymour on (07) 4616 9898.
This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.