The one thing that the ATO wants a taxpayer to do is to refrain from disengaging. If the ATO can keep a dialogue going, they can encourage lodgement compliance and remain aware of the true debt position. As a result, the ATO has encouraged taxpayers to reach out when they have a cashflow problem and seek a payment plan. For debts less than $200K, you can achieve this simply with an online application.

During COVID, considerable lenience was shown to taxpayers, and with good reason, but it did result in a blowout in ATO debt which increased 89% in the 4 years to 2023 reaching $50.2 Billion. Sooner or later the ATO had to get tougher on collections and we are now seeing more Director Penalty Notices and more Winding up Notices. However, it seems that this collection activity is largely targeted at those taxpayers who have become disengaged.

For those that kept talking to the ATO, and have taken advantage of a payment plan to get them through a tough time, (particularly if it was COVID-driven) then the willingness of the ATO to act sensibly in reaching an appropriate payment plan has been immensely helpful. Many of these taxpayers are now back on track and diligent in fulfilling their taxation obligations.

There are, however, some businesses for which the existence of a payment plan delayed the inevitable. A loss-making business that wasn’t able to trade profitability post-COVID is now just a failing business with a larger debt burden. Some of those businesses have been able to take advantage of the Small Business Restructuring process to wipe off a large chunk of their ATO debt, but that process is only helpful to those businesses that owe less than $1m to creditors.

For slightly larger underperforming businesses, it is not uncommon to see a series of ATO payment plans for ever-increasing sums. Many of these Companies will at some point end up in the hands of a Liquidator and this is where the existence of an ATO payment plan becomes problematic.

Section 255-15 of Schedule 1 of the Income Tax Assessment Act 1953 (Cth) (“TAA”) provides that:-
The Commissioner may, having regard to the circumstances of a Taxpayers case, permit the Taxpayer to pay an amount of a tax-related liability by instalments, and that the arrangement does not vary the time at which the amount is due and payable.

Why is this significant? Well, a Director has a duty to prevent a Company from trading whilst insolvent, and Section 95A of the Act says that “a person is solvent if, and only if, the person can pay all the persons debts as and when they become due and payable.” A person who is not solvent is insolvent. 

This means that notwithstanding that Directors may have reached an agreement to pay an existing ATO debt by instalments, those amounts are still due and payable, and sometime down the track will be used by the Liquidator (or insolvency expert witness) to calculate whether the Company was able to pay all of its debts which were due and payable from its available financial resources.

This is of course very different to what would happen if a business entered into a written payment plan or had agreed on extended terms with an ordinary trade supplier.

The unreasonableness of Section 255-15 has been debated several times in various proceedings, but at first instance, and on appeal to the full Federal Court in the matter of Clifton (Liquidator) v Kerry J Investment PTY Ltd trading as Clenergy, it was determined that :
Section 255-15 reflects “a deliberate legislative policy that regardless of entry into an arrangement, the debt remains due and payable“  and the payment arrangements did not constitute a waiver by the Commissioner of the Company’s obligation to pay a tax debt.

The existence of a payment plan could in many instances be argued to be an acknowledgement by both the Directors and the ATO that the Company was unable to meet the existing tax debt which was due and payable, and can be a major factor in the determination of insolvency both at that point, and thereafter. 

Surprisingly, none of this is communicated to a Director at the time of entering into a payment plan and it would be unusual for any correspondence to even mention that the payment plan was being entered into under Section 255-15. 

As a result, and also having regard to Section 588FGA of the Corporations Act (which provides the ATO with an indemnity from Directors for any unfair preference payments ordered by the Court), it would seem that upon entering into an ATO payment plan, Directors are effectively going “all in” (as they say in poker) as the failure of the business is likely to result in considerable claims being made against the Directors personally.

Accordingly, Directors and their advisors should be fully aware of the consequences of entering into, and failing to meet the terms of an ATO payment plan, having regard to the significant personal liability that may arise.