Debt agreements with the ATO: How to get yours accepted
As you can imagine, the Australian Taxation Office (ATO) isn’t your typical creditor. Whenever they make a decision they take a lot more into account than just the commercial return they might get.
However, the ATO is usually the largest creditor on an insolvent matter. And because of that, your clients need to know how they think. So here’s some information for them about how the ATO approaches voting on an alternative debt agreement to Bankruptcy and Liquidation.
The most important thing your client should do is keep a good compliance history. This will help them a lot if they ever get into trouble and need some leniency form the ATO. On the other hand, your client won’t get much sympathy if they:
- ignore the ATO and stick their head in the sand
- fail to lodge their BAS on time
- have a history of failed companies or repayment arrangement defaults.
The ATO will consider each case on its individual merits. The Commissioner generally supports proposed arrangements or agreements that:
- have no adverse features
- will allow the Commonwealth to recover more than it would get from Bankruptcy or Liquidation.
What can influence the ATO’s decision on an alternative debt arrangement?
When determining whether to vote for an alternative agreement or arrangement, the ATO considers factors such as:
- any legal advice they may have obtained
- the contents (including relevant omissions), comprehensiveness and adequacy of relevant reports in:
- the Statement of Affairs or Report as to Affairs
- the Proposal
- the report prepared by the Trustee or Administrator
- any liabilities that haven’t been established, such as unissued assessments or outstanding documents
- whether the debtor has made appropriate arrangements to meet future tax liabilities
- compliance history of both the debtor and related parties or entities
- the extent and seriousness of any taxation offences that may have occurred
- the likelihood that the proposals put forward can be achieved
- maintaining any priority the Commissioner may have had in Bankruptcy or Liquidation
- any association between the debtor and other creditors (including associations that involve an assignment of debt)
- the investigative tools available to a Trustee (in a bankruptcy) or Liquidator (in a liquidation scenario)
- matters considered to be of public interest, or that reasonably question the fairness and appropriateness of voting in support of proposals;
- any apparent voidable transactions or dispositions they may be unable to pursue if the proposal is accepted
- tangible benefit to the Commonwealth revenue they expect to gain from any proposed arrangement
- how the proposal would distribute a dividend between all classes of creditors
- whether the proposal is considered to be unfairly prejudicial or discriminatory.
Factors specific to Bankruptcy arrangements
If the debtor’s income exceeds a particular threshold level, they may need to make contributions from future income towards their bankrupt estate under section 139P of the Bankruptcy Act.
These contributions will only be available under Part IX debt agreements and Part X PIAs if the agreement terms specifically provide them.
Factors specific to a Deed of Company Arrangement (DOCA)
The ATO will not withdraw or stay any action against a director where the terms of a deed purport to limit the Commissioner’s rights to take (or refrain from taking) some action. Such terms under a DOCA are ineffectual, and the ATO will vote against any deed that includes such a clause.
If the proposed DOCA includes the use of a creditors’ trust, additional factors will need to be considered.
What if the Commissioner doesn’t like the debt arrangement/agreement?
The ATO acknowledges that as a creditor the Commissioner must abide by:
- Agreements under Part IX or Part X of the Bankruptcy Act
- Compositions or schemes of arrangement under Division 6 of Part IV of the Bankruptcy Act
- Deeds of Company Arrangements under Part 5.3A of the Corporations Act.
Nevertheless, the ATO will seek appropriate relief through the courts where an agreement, scheme or arrangement accepted by creditors:
- appears to unreasonably disadvantage the Commissioner
- contains other adverse features.
Staying in the good books with the ATO
The ATO is a bit like the sleeping giant. If you start provoking it (i.e. losing your goodwill with the ATO), when it sees you it won’t be friendly.
So make sure you always act in good faith, be honest with them, make your lodgments on time and do want you say you’ll do. By doing so you’ll give yourself a much better chance of having your debt agreement/arrangement accepted.