ATO Debts: When are they due and payable?
With the recent increase in debt recovery efforts by the Australian Taxation Office (ATO), many have resorted to negotiating payment arrangements. However, there are some downfalls to such arrangements.
The recent decision of Smith v Bone  FCA 389 highlighted the potential liability a director faces where a company enters into a payment arrangement with the ATO. In this case the company, Petrolink Pty Ltd, had entered into a payment arrangement with the ATO. During the 8 years prior to the company’s liquidation, the company had made a total of 26 payment arrangements with the ATO for payment of its outstanding debt. Only 1 of these arrangements was honoured by the company. A number of these arrangements were made within 2.5 years prior to the appointment of a liquidator.
The Court held that a liability to the ATO is taken to have been incurred on the date shown as the effective date of the debt on the ATO’s running balance. Although many corporate taxpayers may enter into payment arrangements with the ATO, it is important to remember that the whole debt to the ATO remains due and payable.
There may be consequences for directors of companies that enter into payment arrangements with the ATO. In Smith v Bone, as the director was aware of the debts the company had to the ATO, he was considered to have reasonable grounds to suspect the Company was insolvent. The deemed date of insolvency was 18 months prior to the Liquidator being appointed.
As a result, the director had contravened section 588G of the Corporations Act by failing to prevent the company from incurring debts whilst insolvent. He was ordered to pay compensation of approximately $900,000.
Lessons from Smith v Bone are that directors should:
- not assume that entering into any payment arrangement is sufficient to prevent the company from being considered insolvent
- continuously monitor their company’s ability to repay its debts as and when they become due
- seek appropriate advice in relation to their company’s financial position in order to make an informed decision as to whether the company is insolvent or not.
If you have any further questions in relation to ATO debts, please contact our team of tax lawyers at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.