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Cash is tight – my debtors won’t pay and I can’t pay my tax!

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This is a common remark. And with the ATO having announced that its more lenient approach towards tax defaulters is now coming to an end, taxpayers who lack the financial resources to meet a taxation commitment run a very real risk the ATO may take aggressive action that may lead to business closure.

Repayment arrangements

At a recent forum hosted by Taylor Woodings, Ross Burns, ATO’s Director of Complex and Strategic Recovery, outlined a number of options open to the ATO to recover unpaid tax.

Importantly, he emphasised that it was the ATO’s preference that taxpayers enter into a payment arrangement with the ATO. He said that most taxpayers will still be invited to offer a payment arrangement, although taxpayers with a poor record may not be treated so compassionately.

So the message is, if you have a tax problem, don’t ignore it, address it with the ATO, and it is more likely than not that you will be given time to pay.

Security deposits

During his address, Mr Burns also spoke about the new arsenal in the ATO’s recovery options, “security deposits”. The ATO can now demand that a taxpaying entity pay a bond or security in anticipation of a failure to meet a taxation liability (past, present or future). The form of security can be in the form of cash or bond, mortgage over real estate, or unconditional bank guarantee.

Although this is a power that could potentially be abused, Mr Burns noted that the ATO will usually only exercise this power in extreme cases.

To date, approximately 27 demands for security have been made. Nearly all are property developers, who claim huge input tax credits during construction (and receive refund cheques from the ATO), yet are tardy in lodging their BAS Statements once the development is complete and has been sold off.

Garnishee notices

Mr Burns also notes that the ATO is now issuing more and more “garnishee notices”. A garnishee notice can be served by the ATO on a person or corporation that owes money to the taxpayer requiring that person (“the Garnishee”) to remit to the ATO whole or part of the sum owing to the taxpayer.

The ATO tends to target banks, employers of the taxpayer, trade debtors of the taxpayer, merchant facilities (such as Visa) and purchasers of assets.

Garnishee orders (having the same effect) can be obtained by judgment creditors as one of the options to enforce a judgment. The ATO, however, is in a more advantageous position as it can serve a garnishee notice without having a Court judgment in its favour.

Director penalty notices

The ATO is empowered to issue a director penalty notice (“DPN”) to a director of a company where the company is in arrears in respect of its PAYG obligations. A director of a company that receives a DPN will become personally liable for the PAYG tax debt unless within 21 days:

  1. the tax debt is paid;
  2. the company goes into voluntary administration; or
  3. the company goes into liquidation.

Prior to changes to the law that came into effect on 1 July 2010, a director could comply with a DPN (and avoid personal liability) if the company entered into a payment arrangement with the ATO. The amended law, whilst not removing the option of the company entering into a payment arrangement with the ATO, does not render such arrangement as compliance with the DPN, with the result that the director will become personally liable for the PAYG tax debt.


Do not expect that the ATO will be lenient in the coming years. If you experience liquidity problems, they should be immediately addressed in order to try and maximise the time you have to deal with the issue. Our team can help you in this area.

If the reason for your tight liquidity is – as the headline suggests – that your debtors have not paid you, the MST Litigation team can also help you recovering those debts.

Author: Philip Colman, Accredited Commercial Litigation Specialist

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