The Bank of ATO: When will the Hiatus end?

As a lender to SMEs, we have seen business debts to the ATO steadily increase throughout 2020.

This is hardly surprising as SMEs were doing it as tough as anyone in the nation as a result of constant shutdowns, volatile trading conditions (to say the least) and, in the case of some industries, revenue instantly dropping to zero.

During this time, SMEs knew that the ATO were not going to take action in the thick of a pandemic and they fully utilised the ‘bank of ATO’ with government stimulus (including job keeper) and delaying statutory payments to the ATO.

At the best of times, the ATO is often thought of by SMEs as a cheap financier but during 2020, it could be argued that, for many businesses, using the ATO as a funding source, moved from convenient to necessary.

Now that, “in Australia, the economic recovery is well under way and has been stronger than was earlier expected.” (Dr Lowe, RBA Governor), it’s time to prioritise your ATO debt before the ATO does. 

Partner and Liquidator at RSM, Mitchell Herrett, comments, “[i]t’s critical that businesses get on top of their cashflow now and forecast the next 6-12 months because the Government’s temporary protections that were in place during 2020 will no longer safeguard businesses from a creditor taking legal recovery action.”

We believe, the greatest impetus for taking action is awareness of consequences if one does nothing.

Warning: The below information may be confrontational and slightly technical for some SMEs but a must know if you have an ATO debt that is getting away from you.

Insolvency Laws are back (mostly)

On 24 March 2020, the Government enacted temporary reforms to the Corporations Act, Coronavirus Economic Response Package Omnibus Act 2020 (CERP Legislation). This was an effort to stall/prevent insolvency proceedings by extending debt response times and placing a moratorium on insolvent trading claims to offset some of the economic fallout from the pandemic. The measures were in place until 31 December 2020.

As of 1 January 2021, the original parameters were reinstated: companies are only given 21 days to defend/pay an outstanding debt of greater than $2,000 or risk being placed into Liquidation. It doesn’t take much for a default judgement to be set against your company and a creditor to use this to initiate insolvency action.

Preference Payments

Sometimes companies are confident that the ATO will not pursue insolvency because they hadn’t heard from them or they think that they have successfully evaded them.

According to the Corporations Act, in the 6 months lead up to insolvency, payments to creditors can be clawed back if not paid according to their priority (Section 588FA) and puts the creditors in a better position than other similar creditors.

The ATO is technically an unsecured creditor, but they often exert power over and above other unsecured creditors. They are able to garnishee (help themselves to) your company bank account and chase payment more aggressively.

As a model litigant, the ATO must respond to requests for clawback (payback money received) from a Liquidator. They will consider their running account position (net increase in debt) leading up to insolvency and potentially pay it back if it has placed the ATO in a better position than other unsecured creditors that claim in the insolvency. For this reason, it’s logical to leave several months before the ATO would even start to consider taking insolvency action against a company.

Directors can be held personally liable

The ATO may recover certain company debts directly from the Director, by issuing a Director’s Penalty Notice (DPN). These outstanding obligations include:

-      Pay as you go (PAYG) withholding

-      Goods and Services tax (GST)

-      Super Guarantee Charge (SGC)

The Director will then have 21 days from a DPN to pay the debt or risk the company being placed in Liquidation. The debt will be held personally and potentially be cause for bankruptcy proceedings to be commenced against the Director. 

What can you do now?

Our view is:

·     Be Proactive – never ignore the ATO, if someone owed you money and disappeared, you would escalate matters too.

·     Enter Payment Arrangements and adhere to them – this demonstrates that you are reliable and consistent and even though cashflow may be tight, you take the ATO debt seriously. If you can’t make a payment or will be late, call them and explain. No-one wants to be on hold to the ATO, but it’s a lot easier than trying to reverse a Court Order for Liquidation (which is very rare).

·     Prepare a cash flow forecast – if you don’t know how, engage someone that prepares them regularly.

·     Optimise your cash flow – this could involve ensuring that you have the appropriate funding solution (like a Tradeplus24 Line of Credit) for your business.

We hope you found this article useful.