Throughout COVID, the Australian Tax Office (ATO) has been highly supportive of businesses, allowing payment-free periods or very low instalment plans, alongside readily waiving interest and penalties.
Recently, however, their attitude has changed, with payment plans increasingly being rejected or requiring detailed information, payment in full being requested, and penalties and interest remaining payable.
So what happens if your proposed ATO payment plan gets rejected and what are your options for managing your tax debt?
What happens if your ATO payment plan gets rejected?
An ATO payment plan offers several benefits to struggling businesses. Most notably, it can help you pay off your debt in a manageable way.
When considering proposed payment plans, the ATO look at various factors. These can include your lodgement and payment history, the capacity of your business to pay the debt and whether you’ve continued engaging with them about the debt.
If your ATO payment plan is rejected, you're at risk of the ATO taking debt recovery action against your business. These actions may include:
- Raising assessments for general interest charge and late lodgement penalties, increasing your overall tax liabilities;
- Reporting a default to credit reporting agencies;
- Issuing director penalty notices to company’s directors, which may make them personally liable for your company’s BAS and superannuation debts;
- Issuing garnishee notices to your company’s bank or debtors requiring them to pay your company’s money to the ATO; and/or
- Issuing a statutory demand and commencing winding-up action for the court to appoint a liquidator to the company.
What are your options if your ATO payment plan is rejected?
Things can become very difficult for you once the ATO commences debt recovery action. Your bank account may be emptied, you may have 21 days to pay your debt, or you could face winding up at court. All of these could spell the end for your business, so it’s crucial to act quickly.
The good news is, if your business has a tax debt it can’t pay, there are options to help it survive and revive. If you’re currently seeking help with this, we can talk you through the full range of options.
The first step is to confirm that your business is viable. That means it can meet its ongoing expenses and make a sufficient profit to cover your own efforts.
This is important as it could mean ongoing trading could cost your suppliers and employees money, you work for free…or worse, if you prop up the business with personal funds, you’re paying to go to work!
The full range of options is below. These business survival options are intended to restore cash flow, return profit, and, if needed, significantly reduce debts:
1. Informal turnaround (IT)
Informal turnaround involves managing cash flow, improving profitability, and continuing trading with an improved business.
While creditor payment terms may be extended during turnaround, there is generally limited or no debt reduction under this option. This means you’ll need to pay creditors in full by obtaining finance and/or negotiating with each creditor to agree on your proposal.
2. Small business restructuring process (SBRP)
The SBRP is a low-cost four to seven-week process where you engage a restructuring advisor to propose reducing your company’s debts and/or an extension of time to pay them, up to three years. It offers many benefits, including that you remain in control during the process and creditors can’t take legal action.
To be eligible for the SBRP, your company needs to have less than $1million of debt, lodge all ATO returns and pay all superannuation.
3. Voluntary administration (VA)
Voluntary Administration involves appointing an administrator to control your company’s business and propose a reduction of your company’s debts and/or an extension of the time to pay them. The process takes about five weeks.
VA is similar to SBRP, however, there are no eligibility criteria, the cost is higher, and control is handed to the administrator. It’s therefore generally suited to more established companies with turnovers of at least $3 million.
4. Sale of business / Informal restructure (IR)
If SBRP or VA isn’t available, you may consider a sale of your company’s business. If you wish to retain the business, the purchaser may be related by common directors or shareholders. The vendor company is then placed in liquidation.
This type of transaction is common. However, it requires care and diligence to ensure it’s not characterised as illegal phoenix activity – find out more.
5. Voluntary liquidation (CVL)
Voluntary liquidation is a process commonly used to close a company cheaply and quickly. It is the alternative to deregistration when you’re insolvent. You may wish to purchase the business and/or assets from the liquidator on an auction-value basis.
6. Keep trading / Do nothing
We don’t recommend this option as it often leads to dire circumstances for the business, its directors and those it deals with.
Trading an insolvent business can cause immense financial loss to those who have supported you, as well as damage your reputation. A creditor will often take steps to wind up at court a company that continues in this manner.
Where to from here?
We know it’s scary being in this position. The fear and uncertainty can be isolating and paralysing. We find that people who make enquiries with us feel relieved with the helpful information and certainty we provide to help them take back control.
The sooner you speak to an experienced professional, the sooner you’ll have the information you need to make the right decisions for you and your business.
While we seek to provide useful information in our articles, there are many considerations when deciding the right course of action for your business. These often only come out in conversations.
Do you have mounting tax debt? Get in touch with our team today on 1800 534 534. We work with specialist tax debt negotiators who can help if the ATO rejects your proposal or refuses your request to waive interest charges.