Disclosure of Business Tax Debts – A New String in the ATO’s Bow

March 10, 2020 Roger Blow

The Australian Tax Office (ATO) now has a new power to add to its already impressive arsenal, being the power to disclose the tax debt information of businesses to registered Credit Reporting Bureaus.

This power was granted to the ATO on 21 February 2020 as part of the Government’s broader strategy to reduce overdue tax, encourage engagement with the ATO, and improve overall transparency. The ATO claims that the measure will ‘support more informed decision making within the business community by making large overdue tax debts more visible’. They further claim that it will address the unfair advantage which businesses obtain by failing to meaningfully engage with the ATO.

The ATO’s criteria for disclosure is:

The business has an ABN, but is not an ‘excluded entity’ (i.e. a registered charity, government entity, deductible gift recipient, or complying superannuation entity);
The business has one or more tax debts, of which at least $100,000 is overdue by more than 90 days;
The business has not effectively engaged with the ATO in managing its tax debts; and
The business does not have an active complaint with the Inspector-General of Taxation concerning the proposed reporting of the business’s tax debt information.

A business that satisfies that criteria then has 28 days from the date of the ATO notification to engage with the ATO and manage its tax debt.

This new power can have a profound commercial effect, particularly on small businesses.

Standard credit defaults generally remain as a black mark on credit reports for a period of five years and have a detrimental effect on the ability to secure or maintain financial support from banks and other credit suppliers. Whilst ATO reported tax debts will only remain visible on a credit report for as long as they meet the above criteria, the default could have disastrous effects for businesses who lose credit eligibility based on the ATO’s report.

Considering the potential ramifications of this new reporting power on a business, it remains to be seen how it will be used by the ATO with respect to debts that are in dispute. However, it does highlight the need for businesses to engage early and often with the ATO when faced with an unpaid tax debt.

Cove Legal provide specialist advice to clients facing possible insolvency outcomes or facing actual or threatened ATO debt action. If you are attempting to address director personal liability issues, director penalty notices, garnishee orders, winding up applications, statutory demands or need advice on an insolvency situation generally, speak to us today.

Roger Blow, Practice Director Ph: +61 8 6381 0326, or e: roger@covelegal.com.au

This publication is not intended to provide and does not provide legal advice. You should seek professional legal advice relating to your specific situation(s) before taking any action based upon its contents.

Tough penalties for Directors involved in phoenix transactions

August 13, 2019 Roger Blow

The Federal Government has introduced into Parliament tough new criminal and civil penalties for Company Directors who engage in illegal phoenix activity.

Illegal phoenix activity is when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts, including taxes, creditors and employee entitlements.

The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 will give the ATO, ASIC and liquidators a range of new powers to target directors, individuals and advisors who conduct illegal phoenix transactions, such as where a Director sells the assets of the company at less than market value (known as a creditor-defeating disposition).

The other key reforms include:

New powers to ASIC to recover property that is the subject of a creditor-defeating disposition and return it to the company for distribution to the creditors;
Preventing directors from resigning and leaving the company with no directors and from backdating their resignation to avoid personal liability;
Extending the existing director liability provisions by making directors personally liable for their company’s GST liabilities;
Increased power of the ATO to withhold tax refunds where tax lodgments are still outstanding.

Company directors and their advisers should be aware of the proposed changes.

Roger Blow, Principal, Ph: +61 8 6381 0327 or roger@covelegal.com.au

The ATO's model litigant obligations

July 18, 2019 Roger Blow

With the ATO’s debt recovery powers again coming under fire in the press for being excessive, what rights does a small business have when the way the ATO handles its claims and litigation is considered to be contrary to its obligations as a ‘model litigant’?

The model litigant rules, or model litigant obligations, are guidelines for how a government body ought to behave before, during, and after litigation.[1] The ATO, like any other Commonwealth agency, is subject to model litigant obligations and has an obligation to:

act with complete propriety, fairly and in accordance with the highest professional standards in handling claims and litigation. This also requires that the ATO not start legal proceedings unless it is satisfied that litigation is the most suitable method to resolve a dispute. [2]

In Shord v Commissioner of Taxation [2017] FCAFC 167 Justice Logan discussed at length the role of the Commissioner and how he is to conduct proceedings to which he is a party. His Honour made the following comments with respect to model litigant obligations:

The ‘standard of fair play to be observed by the Crown in dealing with subjects’ in litigious business, termed the duty to act as a model litigant, antedates and, if anything, is more onerous than the duty which all parties and their lawyers have in proceedings before this Court to assist in the achieving of the ‘overarching purpose’ of facilitating the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible: s 37M and s 37N, Federal Court of Australia Act 1976 (Cth). [3]

His Honour went on to say:

Departures from model litigant behaviour can, in particular circumstances, constitute professional misconduct, a contempt of court or an attempt, contrary to s 43 of the Crimes Act 1914 (Cth), to pervert the course of justice. [4]

However, it has also been confirmed by the Courts that an alleged failure on the part of a Commonwealth Agency to act in accordance with its obligations does not exist in Australian law as a distinct cause of action. As a result, such failures (aside from a potential complaint to the Attorney General) can only be actioned via a request that the Agency pay the legal costs within existing proceedings, that it can be argued arise from the breach(es) of those obligations.

Cove Legal offers specialist expertise in the area of tax disputes and insolvency. We represent clients in Court winding up applications and bankruptcy petitions and provide strategic advice on ATO payment plans and all other aspects of ATO debt recovery action (such as director penalty notices, garnishee notices, freezing orders, default assessments, audit requests and ATO criminal prosecutions).

Roger Blow, Principal, Ph: +61 8 6381 0327 or roger@covelegal.com.au

[1] https://www.ruleoflaw.org.au/priorities/model-litigant-rules/

[2] https://www.ato.gov.au/General/Dispute-or-object-to-an-ATO-decision/In-detail/Avoiding-and-resolving-disputes/Litigation/Litigation---our-policies/

[3] Shord v Commissioner of Taxation [2017] FCAFC 167 at [169].

[4] Ibid at [174].

Changes to Director Penalty Notices

July 4, 2019 Roger Blow

Since April 2019 there has been an important change to the Director Penalty Notice (DPN) regime in relation to a Director’s personal liability for an unpaid Superannuation Guarantee (SG) debt.

A Director will now be personally liable if a company’s SG liabilities are not remitted within 28 days of the end of each quarter. Previously a Director had 3 months to report their superannuation and settle the debt without the risk that the ATO would issue a lockdown DPN.

A Director who fails to lodge SG returns within the 28 day time period will cause the ATO to issue a lockdown DPN, which makes the Director automatically liable for those specific debts and prevents them from escaping liability via a liquidation/administration.

Directors should note that these changes do not alter the 3 month period allowed for the settlement of a company’s PAYG debt.

Cove Legal are experts in assisting clients with contentious tax matters and insolvency proceedings. We provide advice on ATO payment plans, director penalty notices, winders and all other aspects of ATO debt recovery action. Practice Director Roger Blow has acted extensively on behalf of the ATO in Perth and has specific expertise in tax related disputes.

Roger Blow P: +61 8 6381 0326 or e: roger@covelegal.com.au