Tax Debts and Insolvent Trading

It is common to obtain tax payment arrangements from the Australian Taxation Office (ATO). Though such arrangements may create new instalment deadlines, the original date that the debt was made due and payable is usually sustained. This means that where a company has secured a payment arrangement with the ATO beyond the original due date, that company may be insolvent, even while meeting the instalment deadlines as stipulated in the new arrangement. This may effectively work to prohibit companies trading while in debt to the ATO, in order to avoid the risk of insolvent trading.

Insolvent Trading

According to s 95A of the Corporations Act and s 5(2) of the Bankruptcy Act, a company is insolvent when it cannot pay all of its debts when they become due and payable. A company engages in insolvent trading when it acquires further debts while insolvent. Insolvent trading is taken particularly seriously due to the detrimental impact that it can have on the interests of creditors, lenders, and shareholders. Insolvent trading is particularly risky for directors, who may become personally liable for debts incurred while insolvent.

Does Commercial Logic Prevail?

‘Commercial realities’ are often taken into account when deciding whether a company is insolvent for the purposes of s 95A. ‘Commercial realities’ include having other assets that would permit the company to pay its debts, and the company soon obtaining the capital required to pay its debts. While the existence of a payment plan with the ATO may appear to suffice as a ‘commercial reality’, particularly if the company is in the midst of disputing the ATO assessment, ATO debts are guarded by the Tax Administration Act. As a result, in questions of insolvency surrounding ATO debts, it depends on the particular action taken by the Commissioner of Taxation.

  • Deferral: If the Commissioner permits a deferral under s 255-10, the payment deadline is varied in accordance with the deferral. Thus, the debt is not ‘due and payable’ until the new, varied date.
  • Instalments: If the Commissioner instead permits payments by instalments under s 255-15, the initial payment deadline is not varied. Thus, the debt remains ‘due and payable’ as stipulated on the original assessment.

This suggests that payments by instalments will invite the risk of insolvent trading, whereas deferred payments will not. While ultimately at the discretion of the Commissioner, for companies with outstanding debts to the ATO, it is best to seek a s 255-10 order.

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