Reinventing the ATO – More Insolvencies & Bankruptcies Possible!

Tax Commissioner Mr Chris Jordan has said in a speech to the Tax Institute on 19 March 2015 that the Australian Taxation Office (“ATO”) is bringing forward the point at which it takes legal action to recover debts from both individuals and companies.
Is this a good thing or bad news?

As a Registered Liquidator and Registered Bankruptcy Trustee, I see too often the impact of when family business owners (or SMEs) and individuals don’t treat the ATO with the same priority as other creditors. Left unresolved it typically means the forced liquidation of a company or bankruptcy of the individual. Consequently, I believe the recent announcement is a good thing for a couple of main reasons:

  1.  It provides other businesses that are tax compliant with a level of confidence in knowing that the ATO is taking more of a pro-active stance in recovering businesses taxes; and importantly
  2. Any effort that causes business owners or individuals to seek professional advice from insolvency and business recovery specialists at an early stage, thus with a greater chance of avoiding liquidation or bankruptcy is a good thing. Isn’t it!

Mr Jordan also indicated that “despite our increased efforts, the amount of debt we have to collect has continued to rise in recent years”. This is concerning at a time when the budget position is deteriorating. Of significance is that the value of collectible debt was almost $19.5 billion at the end of June 2014 – up almost 10% on the previous year.

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He also went on to indicate that “we will be taking legal action earlier when warranted. This means initiating bankruptcy and wind-up action where there is evidence that a tax payer is insolvent, and looking to use other statutory powers where businesses have failed to pay employee superannuation entitlements or pay amounts held in trust. In the past, we have waited for taxpayer’s debt to escalate to an average over $300,000 before initiating bankruptcy proceedings, compared to other creditors who often take action at around an average of $35,000. For corporates, we wait for their debt to be more than $340,000 compared to other creditors who initiate action at an average of $93,000.”

The above statement indicates that the ATO is likely to look at recovery action along similar lines of a corporate. Further, the ATO has long held a view that PAYG withheld from an employee’s pay is in effect “money being held on trust for the ATO” and should not be generally used by the company as working capital indefinitely. This is a common misconception by a number of SMEs and not well understood.

Whilst the above comments were only one part of Mr Jordan’s speech titled “Reinventing the ATO” which is available from the ATO website www.ato.gov.au it does highlight the focus the ATO is putting into this area and others to improve outcomes and engagement with specific stakeholders.

The ATO already has significant tools at its disposal to aid in the collection process, for example Garnishee Notice and Director Penalty Notices, as well as the formal recovery actions such as Bankruptcy Notices and Statutory Demands – but importantly it needs to use these with reference to the above targets in mind and to act like a typical creditor seeking to recover amounts outstanding. It must however be transparent, talk in plain English and be fair in its recovery efforts. Such things are mentioned in the speech and the blueprint document available from the ATO website.

Only time will tell if all the talk amounts to anything real. Hopefully it does for the sake of all taxpayers.

If you find yourselves overburdened with tax debt and you are unsure how to approach dealing with it, give me a call and we can evaluate the options and devise a plan to deal with it. More information about options is available from our website jonespartners.net.au .

Will the Australian government’s “single touch payroll proposal” create more insolvencies?

The Australian government announced measures to cut red tape for business and to provide a simplified payroll system that would mandate or a “single touch payroll system”

The Australian Taxation Office (ATO) is currently conducting a consultation process in order to examine the consequences of this measure and has called for submissions from stakeholders.

Under “single touch payroll”, employers will be required to electronically report payroll and super information to the ATO (Australian Tax office) when employees are paid, using standard business reporting – enable software. This is different to the current situation where employee tax deducted from payroll is reported in the employers BAS and only forwarded to the ATO depending on the particular companies reporting requirements. Superannuation is only required to be forwarded 28 days from the end of each quarter. If the super deducted from employees pay is unremitted employers have three months to report the breach to the Australian taxation office.

The Institute of Chartered Accountants has been privy to the discussions behind this strategy and has shared some useful insights.

The “single touch payroll” proposal does appear to afford a considerable reduction in red tape and is therefore clearly very advantageous to business.

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This should make small businesses much more efficient and as a consequence reduce the likelihood companies going into liquidation or administration or directors facing personal bankruptcies

On the other hand there may be cash flow implications for small businesses in that they will be required to remit the employee deductions at the end of each pay period.create more insolvenciesIt is likely that this cash flow pressure will increase the numbers of company liquidations, administrations and receiverships due to the fact that company directors will be forced to approach insolvency practitioners at a much earlier time.

There is of course a very big advantage to the ATO that there will be an early warning where tax and superannuation are unremitted.

One of the biggest problems facing the economy so far as insolvent companies are concerned is that when a company is in financial difficulty and cash flow is tight it is too easy to use unremitted PAYG tax and super as working capital to fund the ailing business. (See Related Article Insolvency and the Tax Man Jekyll and Hyde)

The problem is compounded because the ATO appears to be somewhat inefficient in chasing up these outstanding debts. As a consequence the insolvent company is allowed to continue for a considerable time often incurring more debts and creating unfair competition in its industry environment.

In defence of the ATO it is frequently unaware of the liability because the employer has not lodged the appropriate documentation.

As a consequence so-called fraudulent Phoenix activity (See related Article Phoenix Fire Reignites) involving a succession of liquidated companies with a similar name, address and phone number employees and website—has become common.

The single touch payroll proposal is a practical way of solving this problem.

Call us or visit our website to see how our specialist team can help businesses facing financial pressure as a result of unremitted taxes and superannuation

Unemployment and Credit Card Debts – The Major Causes of Bankruptcy in 2014

Recent statistics issued by the Australian Financial Security Authority (“AFSA”) reveal that for the 2013/14 financial year unemployment/loss of income (8,418) and excessive use of credit card facilities (6,999) were the top 2 causes of personal insolvency. These causes have remained relatively stable since 2007/08 and are not necessarily a huge surprise.
Whilst not overly unexpected, in my experience as a Bankruptcy Trustee it does illustrate what I find commonly happens and should serve as a timely reminder for individuals who may find themselves in a position where their employment has been terminated.

When there is a loss of employment, it is not uncommon after the termination payment has been spent for there to be a tendency to rely on credit cards to continue funding expenses and lifestyles of the individual / family. After all there is a view taken that another job will be just around the corner. Or will it? What was just going provide very short term funding to get through then goes on for many months and additional cards frequently get added along the way. Before you know it there may be about 6 credit cards (and quite often more) all with between a $5,000 – $20,000 limit. Oh and I forgot to mention the odd personal loan and monies borrowed from family members. For example in 2014 I was appointed to a bankruptcy administration where the individual had accumulated 12 credit card debts with combined debts over $250,000. Ouch!!

Debit Card - Digital Payments Processing System. Bank Card. Financial Photo Collection.

With no real change in employment circumstances (ie still unemployed) and no real trimming of family or personal expenses and being able to only make minimum payments, the whole position spirals quickly out of control. This cycle also quite often involves a health issue which can further exacerbate the feeling of helplessness. And then the calls start from the collection agencies appointed by the credit card providers which add more stress.

The statistics also reveal that for 2013/14 excessive use of credit for clerical and administrative workers was the most common cause personal insolvency.

When business confidence is low (ie because there isn’t much top line growth to be easily had in the business) there is a tendency by management to focus on headcount and other overhead expenses to meet profit targets and appease shareholders. This means looking at exiting certain staff. With the unemployment rate currently sitting at a stubborn 6.3%, individuals and households should regularly review their reliance on credit as a means to fund day to day expenses particularly where such debt is not being regularly cleared in full or substantially so.

None of us ever really know what is around the corner, however if we hit corner already burdened with credit card debt, the path then becomes a slippery slope. If you are finding that your financial position is getting out of control why not speak to us for initial free consultation. You can also visit our website jonespartners.net.au and read more blog articles on bankruptcy and related topics. If you would also like to know more about the recent statistics released, please visit www.afsa.gov.au .

Voluntary Bankruptcy – A big thank you from the Bankrupt! Strange – Not Really

Recently I received an email from a former Bankrupt whose bankruptcy I had been administering. The email said “thank you both for your handling of this matter. Whilst a stressful time, your communication and consideration was very much appreciated”.
This individual had accumulated a range of credit card debts of just over $350,000. The incurrence of such debts was largely due to some significant health and family issues that he had been trying to deal with over many years. However, it got to the point where he could no longer make any headway on the level of credit card debt, despite earning a six figure salary. The inability to reduce the debt was taking a toll on his health and overall future perspective.

Consequently after considering the various options, he declared voluntary bankruptcy. In years 1 and 2 of the Bankruptcy, certain realisations were made such as equity in real estate and receipt of compulsory income contributions. These realisations enabled a first interim dividend to be paid to unsecured creditors. All was going to plan.

Importantly, I recall prior to the voluntary bankruptcy commencing that I discussed the topic of “after acquired assets” with him. In particular, my example was that of an interest in a deceased estate that may arise during the 3 year period of a bankruptcy. Certainly, this was not anticipated as the relationship with his family members had become fractured and quite strained. In short, the interest acquired or that devolves upon a bankrupt at the commencement of or during their bankruptcy from a deceased estate is an asset of the bankruptcy and therefore available for the benefit of unsecured creditors.

During the latter part of the 2nd year of the bankruptcy, he received notification from the Executor of his Late Father’s Estate that he had been listed as a beneficiary to approximately ¼ of the Deceased Estate (this such share was worth approximately $400,000). This was quite a surprise given the relationship with his family. When I received such notification from the former Bankrupt and confirmed same with the Executor, I discussed a solution with the Bankrupt which saw me suspend for a period of time of the compulsory income contributions he was making. This afforded him some breathing space, whilst not jeopardising the position of unsecured creditors given the share (or distribution) expected from the Deceased Estate, ie it was going to be sufficient to pay out all unsecured creditors in full, including interest claims.

Subsequent to be notified of the interest, there was a regular exchange of information regarding the timing of the receipt of the Deceased Estate Funds, as well as timely distributions being made to unsecured creditors of the Bankruptcy. Very recently sufficient monies were received from the Deceased Estate whereby a final dividend distribution was made to unsecured creditors and the bankruptcy annulled by force of Section 153A of the Bankruptcy Act.

Whilst from my perspective as a Bankruptcy Trustee, I approached with this Bankruptcy with the same degree of care and skill as any other bankruptcy administration, it is clear that the individual was appreciative of the support, explanations and communications that he received from me and my staff which assisted in him being able to close at this chapter and commence a new one.  After all, there is light at the end of the tunnel for those in financial difficulty.

This bankruptcy administration was also a fantastic outcome for unsecured creditors who saw all monies owed to them repaid!!

Bankruptcy is often demonised by people that know little about it factually (the Jack of All Trades & Master of None!) or alternatively those that have been a recalcitrant bankrupt and did not get away with what they thought they could! Getting the right information about personal insolvency options and the outcomes can very often help alleviate (not eliminate) some of the stress that is part of making this important choice.

If you would like to know more about personal insolvency options or have a client in financial difficulty please do not hesitate to contact me.