Liquidation involves the orderly winding up of your company, and distribution of assets to creditors and shareholders. While debts to the Australian Tax Office rank with equal importance to those owed to other unsecured creditors in the event of liquidation, there are instances when company directors may be personally liable for the company’s outstanding tax debt.
Here, we outline what usually happens to tax debt in the event of liquidation, and the circumstances under which tax debt can be recovered from company directors by the ATO.
Tax debt owed to the ATO in the event of liquidation
In 1993 the law was changed to revoke the priority repayment of tax liabilities, and so in most cases today tax debts are usually treated like any other debt owed to unsecured creditors. Generally, after paying for the costs of the liquidation, the liquidator is required to first distribute the proceeds to priority creditors before paying unsecured creditors. Once a tax clearance certificate is obtained from the ATO, any remaining proceeds can be distributed to the shareholders, if applicable. If you have already appointed a liquidator, he or she will guide you through the process, and make sure you are prioritising your creditors correctly.
What can the ATO do to pursue tax debts?
The ATO has a number of options for pursuing tax debts, which may or may not be utilised around or during the liquidation stage.
- Contact – The ATO will usually start by simply contacting you and reminding you about your outstanding tax debt. They might contact you via email, telephone, or through a debt collection agency.
- Garnishee notice – These notices are served to a third party that holds money on your behalf, so it’s often banks that receive these notices. Garnishee orders usually require a court judgement, but under the Tax Administration Act the ATO has a unique power to issue garnishee notices without a court order.
- Director penalty notice – DPNs are served to directors of companies that have outstanding PAYG Withholding and/or Superannuation Guarantee Charge (SGC) payments. With a DPN, company directors are held personally liable for tax debts that the company should have paid.
- Statutory demand – The ATO can issue a statutory demand under Section 459E of the Corporations Act to have the tax debt paid. If you have received a statutory demand, you have 21 days to repay the debt before the ATO can commence proceedings in court to have your company wound up.
- Wind–up – The ATO has the option to apply to a court to have the company liquidated.
When can the ATO hold company directors personally liable for tax debt?
For company directors facing liquidation that has outstanding tax debt, a key concern is the lockdown or limited remission rule. If your company has outstanding PAYG withholding or SGC amounts and you have received a director penalty notice from the ATO, putting your company into liquidation before the 21 days expire (or appointing an administrator or repaying the debt in full) will remit the notice. This practice is known as phoenixing because the director avoids personal liability by putting the company into administration or liquidation.
However, the lockdown rules that were introduced in 2012 limit phoenixing for companies that have unpaid PAYG withholding or Superannuation Guarantee Charge (SGC) amounts that are unreported. That means you as the company director cannot avoid a personal obligation to repay this outstanding tax debt even though your company has entered the liquidation phase, and the ATO can pursue you, personally, for tax debt of this type.
This applies to any PAYG withhold debt that is left unreported three months after it first became due, and SGC amounts that are unpaid and unreported three months after the lodgement due date for any SGC statement. This is true even if you are a new director and your company has PAYG withholding and SGC amounts that were due before you were appointed. Newly appointed directors have 30 days after their appointment before they become personally liable for these types of tax debt, but if your company goes into liquidation within this period, you will not be held personally liable.
Defences to director penalty notices
In some cases, you could challenge a director penalty notice. For example, you might be able to successfully challenge the notice if you can show you did not participate in the management of the company due to illness, or some other good reason.
Similarly, you could successfully raise a defence if you can show you took all reasonable steps to ensure the company paid the outstanding amount, an administrator was appointed, or the directors started to wind up the company. Alternatively, you might be able to challenge personal liability for those debts if you can show there were no reasonable step you could have taken to prevent the debt from occurring.
The importance of understanding your options
Whether your company is about to enter liquidation or is already at that stage, if you have cause to be concerned about any outstanding tax debt owed to the ATO, it’s vital to consult an insolvency expert in a timely manner. An experienced advisor in this field can give you advice on what to do with your tax debt obligations, and help you understand your options in the context of liquidating your business. You might be able to raise a successful defence against director penalty notices, or find out exactly what you need to do in order to fulfil all your obligations relating to tax debt. Getting the right advice at this stage could make all the difference, and enable you to achieve the outcome that you want.
As qualified and professional business tax consultant we work with you to achieve your goals and minimize your tax. Feel free to contact us at anytime. We are a team of professional and affordable business tax accountants providing a complete range of accounting, taxation and business services to clients throughout Australia.