"D??o??n??'??t?? bet your house on it"

A few years ago, I assisted a business in severe financial distress to negotiate a long term repayment plan with the ATO. The business had an enormous tax debt, accumulated over a lengthy period.

At first, this looked like an insurmountable obstacle. However, after a thorough review of all of the surrounding circumstances, we realised we may be able to obtain a very extended (and therefore manageable) repayment plan, by offering the ATO a personal guarantee from the director, supported by a mortgage over his house.

Offering additional security and attempting to "dig oneself out of a hole" is not the right approach for every situation. However, in this case, a thorough assessment on Day 1, including careful cash flow modelling, resulted in a view that this would be the best approach.

The director decided, in effect, to bet his house on the company being able to make a financial recovery.

After this decision was made, I worked with the director, his accountant, and the ATO to negotiate a workable plan, and to put the guarantee and security in place. Once everything was locked in, I sent a (modest) bill and closed my file.

Update – November 2021

Yesterday, out of the blue, I received an email from the director advising that the repayment plan had been completed, and that all the tax arrears had been repaid.

In fact—and possibly partly because the problem had been solved so quietly—the business had bounced back so well that it had managed to pay out the entire plan many months ahead of schedule: a fantastic outcome!

It was wonderful to have our Day 1 decision vindicated years later, and to receive news from the client that it had all gone well, resulting in a win-win (win-win-win-win!) for all stakeholders: not just the ATO and the business, but also dozens of employees and suppliers – and of course the director, who had put everything on the line.

A mortgage? To the ATO?

It has become more widely known in recent years that the ATO will, in the right circumstances, be more generous with its payment arrangement terms for payment arrangements that are backed up by security.

General requirements for payment arrangements are dealt with in Annexure B to the ATO's Practice Statement PS LA 2011/14, "General debt collection powers and principles". Paragraph 61 of the Practice Statement sets out the list of factors the ATO will take into account in determining whether to accept payment by instalments. One of those factors is whether any risk of non-compliance could be overcome "by seeking some form of security for the debt from the taxpayer".

The giving of security for ATO payment arrangements is dealt with in Annexure C to the Practice Statement, which sets out the type of security preferred, and other useful guidance to taxpayers seeking to make a proposal for a secured payment arrangement (and their advisors).

In this case, familiarity with those guidelines enabled us to assess all of the client's options on Day 1, rather than simply shoehorning the client into a voluntary administration process (as was being urged upon him by other advisors).

Although voluntary administration is often the best option, sometimes it is not. In a small industry, where competition is strong and word spreads quickly, some businesses never fully recover from the impact of a formal, public insolvency process. In addition to that, the stress inherent in the process, and (for some people more than others) the embarrassment and personal sense of shame, provide powerful reasons to explore other options.

In this case, the client's decision to pledge his family home as security for his business's tax debt was fully vindicated. In the event, the debt was repaid, the business thrived, and the stress, expense and long-term impact of voluntary administration (including the risk that a public process posed to the future viability of the business) was completely avoided.

With good advice, success stories like this are common. Over the years I've seen dozens of successful turnarounds, where businesses have been brought back from the brink and have gone on to thrive. Many have involved a well-run voluntary administration. Others, such as this one, have been kept hidden from public view.

In the end, it's all about the result. Receiving the wonderful news of a successful outcome, years after my work had been done, made it all doubly worthwhile!