It has been widely reported and in the main accepted that the Australian Taxation Office ("ATO") aren't actually the best when collecting their debts. Many talk about 'threshholds' and 'agreements' when speaking about their interaction with the ATO but in reality, when the ATO forces the hand, it generally ends up collecting 5% of the debt owed. When the ATO is owed over $35 Billion dollars and has a net debt growth of around 10% per annum, this is a big issue and it won't go away very quietly.
The ATO has re-established their stance of collection in the last six months with their suite of options including garnishee notices, payment arrangements, director penalty notices and winding up applications. That said, is it really making a difference? You see, 64% of all insolvent debt is made up by small business and 60% of all small business have turnover less than $500,000 according to a report by the Inspector General of Taxation, Mr Ali Noroozi.
One of the recommendations put forward by Mr Noroozi was that the ATO take security by way of mortgages or bank guarantees and that the internal process for the ATO is better refined. Also, an increased utilisation of external debt collection agents to collect debt owed to the ATO was a key point. Other than these, the majority of the recommendations were benign with the exception of moving the debt collection team into the compliance section (audit) of the ATO.
What does it mean for members of the AICM? Well there are a number of factors I believe our membership should take into consideration:
a) Director Guarantees;
b) Company Tax Debt; and
c) Garnishee rights.
Let's deal with each of these quite specifically:
The Inspector General of Taxation has recently reported to the Commissioner of Taxation that the powers that the ATO have to gain security for debts owed to the ATO should be more regularly utilised. When AICM members seek Director's Guarantees, the question needs to be asked about the debt owed to the ATO and maybe even requesting a copy of the latest running account balance from the ATO. One naturally assumes that a guarantee is actually worth something but when the ATO infiltrates the security mix and potentially dilutes any equity that a creditor is relying upon, a guarantee may well not be all it seems. Therefore, not only at the time credit is provided but at regular intervals, AICM members should seek updated information from debtors as to their financial position and determine the dilution if any of any equity that directors have at that time. Perhaps reconsider terms whereby a bi-annual review on the debtors financial position is conducted by your external accountant or insolvency expert.
Company Tax Debt
The ATO is not commercial in its collections and the principle issue here is that the ATO is increasing its debt by 10% on average for the last three years; which when extrapolated out would mean that as at 30 June 2015, the total debt owed to the ATO would be in the vicinity of $40B with almost half of this being written off by the ATO.
So, what does this mean for business? It means that now more than ever, businesses need to make sure that if they have a debt owing to the ATO that they need to be proactive in their approach to managing this debt. Putting it in the too hard basket just doesn’t work and potentially places the businesses and its directors at further risk.
The principal thing to remember here is that there is clearly a desire to effectively transfer the debt owed to the ATO by a company and lift the corporate veil by way of seeking security from a company’s directors. This will only place pressure on debtors to extinguish claims by the ATO in priority to other creditors or in the alternative dilute their personal equity position as outlined earlier. Early advice is key.
The ATO has been quite aggressive with garnishee notices over the last six months. So much so that anecdotally we have been alerted to the ATO seeking to garnishee debts owed to factoring and debtor finance
entities and attempt to ‘jump ahead’ using terms like ‘statutory charge’ and other acute legal arguments. AICM members should remember that the ATO have a suite of information available to them and can intercept debts owed to AICM members which could be uncomfortable for cashflow and any other collection strategies. The important factor to take into account here is to use the ‘be ahead of the game rule’. Information is the key and knowing what is going on in the debtors business should provide the most comfort.
What AICM members should do is seek good sound advice from their lawyer or external accountant at the very least. This advice should be sought long before the situation gets out of hand. Whilst the ATO are getting their shop in order, the warning should now be heeded that the ATO is in the gym muscling up for their next phase of collection strategies. The risk for AICM members is that the ATO has a wealth of resources to muscle up and have many statutes on their side. The reward for AICM members that choose to stay ahead of the game is to minimise any exposures that could come about because of an aggressive collection process instituted by a goliath organisation that really should have dealt with the debt owed to it long before now.
Adam Lysle is Senior Manager at Veritas Advisory. www.veritasadvisory.com.au