BEWARE: ATO flags tougher stance on small business tax debt

Recent media coverage about the ATO tougher stance on small business tax debt [Daniel Meers from Herald-Sun on 21 May 2015] should serve as a timely reminder to company directors (owners) that find themselves unable to pay GST / PAYG or SGC to get the right professional advice, rather than ignoring the problem with the hope that they will be able to deal with it later. The recent article titled “No More Mr Nice Tax Guy” was also published in the Daily Telegraph.
The article in short indicated that the ATO has begun a crackdown on unpaid small business tax debt. This should come as no surprise as it tends to be these types of companies (ie mainly family businesses) that more frequently have significantly aged debt with the ATO either though non-lodgement and non-payment of returns and GST / PAYG / SGC or alternatively just do not pay such taxes on time. Sometimes there are legitimate reasons as to why it’s occurred, ie ill-health etc. However, the position still needs to be dealt with. In other circumstances, it may not be possible to negotiate a payment plan or some other arrangement with the ATO and thus some company directors (owners) will need to consider the financial position and future of their company, ie voluntary administration or voluntary liquidation.

Of particular interest was the ATO’s position, where Ms Cheryl-Lea Field revealed:

“There are a small number of people that won’t engage with us, and they may be trading insolvent or deliberately not paying.”

Ms Field confirmed that the ATO would not close businesses that genuinely wanted to arrive at a payment plan. However there was a clear message, that being if you are having difficulty, contact (either yourself or your advisor)  the ATO and see what can be worked out.

Ms Field also touched on a point I have raised previously, that being it is important for industry competitiveness that all businesses try and pay on time their tax debts (as well as lodge returns), as otherwise those that do not for a sustained period of time have an unfair advantage over those that do. Specifically, she revealed “it wasn’t fair for the ATO to overlook businesses refusing to pay taxes. If someone up the road is not paying their [PAYG] withholding or their superannuation, then that is simply not fair.”

It is critical not just with the ATO’s recent focus, but importantly with the Director Penalty Notice (“DPN”) regime in place for unpaid PAYG and SGC that company directors (owners) realise they can be personally liable for certain tax debts. In previous blogs I have covered the DPN regime in detail.

Whilst one can understand that family businesses at times have the ATO significantly down the payment queue, the ATO did say recently in a paper that it wanted to reduce the level of its “aged debt”. So this tougher stance should not come as much of a surprise.

As a Registered Liquidator with significant insolvency experience in dealing with family businesses, as well as having a detailed working knowledge of the DPN regime, I am happy to discuss with any company director that may be feeling under a little pressure regarding their company’s tax debt with the ATO and their potential personal exposure. However, as with many things in life, the sooner you get the right professional advice, the sooner financial independence can be regained. So don’t leave it any later than you need to.

Anecdotal evidence I have seen over the past few weeks reveals that the ATO does appear to be issuing more statutory demands on companies, as well as initiating winding up applications.

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.

iStock_000036511194LargeCOPY

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 .

Insolvent Builders & Home Warranty Insurance (“HWI”)

For many individuals or couples one of the biggest purchases in their lives will be the construction of a new home. Unfortunately over the years there have been many residential home builders that have gone into some form of insolvency administration and ceased to trade, leaving home owners with an incomplete home and lots of worries.
We are frequently appointed as Voluntary Administrators or Liquidators to residential home builders where they are insolvent. In one recent matter, there has been an instance where the HWI policies were not adequate to cover all costs incurred in completing the homes. We highlight in this article some important considerations customers should give if such an event occurs.

HWI is taken out by the residential home builder and is designed to cover customers. From 1 July 2010, the NSW Self Insurance Corporation, trading as the NSW Home Warranty Insurance Fund, took over as the sole provider of home warranty insurance in NSW. QBE Insurance (Australia) Limited and Calliden Insurance Limited were appointed as insurance agents of the NSW Self Insurance Corporation, through a contractual arrangement.

Importantly HWI provides a set period of cover for loss caused by defective or incomplete work in the event of the death, disappearance or insolvency of the residential home builder.

From 1 July 2002 a key element of a HWI policy is that it must indemnify beneficiaries (i.e. the customer) for non-completion of work due to early termination of the building contract. Insolvency of the residential home builder typically results in the termination of the building contract.

Critically from 1 February 2012, a HWI policy:

  • is required to be obtained where the contract price is over $20,000 or, if the contract price is not known, the reasonable market cost of the labour and materials involve is over $20,000; and
  • must provide cover of at least $340,000.

Relevantly claims for incomplete work are limited to 20% of the contract price (up to a maximum of the cover provided under the policy). It is this aspect that we believe is not always well understood by customers and indeed the residential home builder when insolvency occurs. We have set out below a recent matter we were appointed to highlight how HWI works when an insolvency event occurs resulting in the termination of the building contract.

Facts

  • Contract value for construction of home $300,000;
  • Costs paid as at insolvency event by home owner for first stages of construction $100,000;
  • Invoice issued by residential home builder for work completed but unpaid $25,000; and
  • Balance outstanding under contract at time of insolvency event / Liquidation: $200,000.

At the date of insolvency, the Insolvency Practitioner is often provided with a debtors listing relating to progress claims made by the residential builder. The recovery of each debtor is not always straight-forward and an accurate position regarding what the customer may owe (if any) can only be determined once the HWI is finalised. This can take many months to determine.

Given the above facts, the HWI and customer position unfolded as follows:

  • Following the liquidation of the residential builder, the customer lodged a claim under the HWI policy.
  • The Home Warranty Insurer arranged for an external consultant to inspect the dwelling to confirm / quantify the amount of works required to complete the contract.
  • The customer also had to prove to the Home Warranty Insurer the quantum of payments made to the residential home builder under the contract. In this case no “cash” payments had been made, but in circumstances where this occurs, this can create issues.
  • Three (3) quotes were obtained from different builders to complete the works. The Home Warranty Insurer then approved one of the builders to complete the works.
  • The certified costs to complete the dwelling were $250,000. Therefore, the customer paid the balance of the original contract price being $200,000 and made a claim for the additional $50,000 under the HWI policy.
  • In this case as the additional cost to complete the dwelling was less than 20% of the original contract price, the HWI covered the additional $50,000 that was required to complete the construction of the dwelling. Therefore there were no monies collectible under the outstanding progress claim in the Liquidation.
  • HOWEVER, if the certified costs had been for example, $285,000 (thus meaning the additional costs were greater than 20% of the contract price), then the customer would have had an uninsured loss to the extent of $25,000 that would have to be met from their own funds. In the particular insolvency administration concerned, there were 3 customers who ultimately had uninsured losses ranging from $25,000 to $60,000 per customer. Not insignificant!!

Unfortunately when an insolvency of a residential home builder occurs, it may take several months to work through this process and it will only be at the conclusion of the building contract once all of the costs are known, that the Liquidator would be in a position to determine if there is actually any debt owning by the customer.

It is important that customers get the right advice as to their position when their builder has been placed into some form of insolvency administration. We caution customers who want to go off miss-informed and complete the dwelling themselves as once this occurs they are likely to jeopardise any ability to claim on HWI.

 

Strengthening our Presence in Greater Western Sydney

For many years now, Jones Partners has truly valued that importance of being accessible to professional advisors and business owners and individuals throughout Greater Western Sydney (“GWS”). The GWS  region is a very significant contributor to the States GDP and has a huge diversity in the range of businesses that operate within it. Our continued presence (via our Norwest Business Park Office) has enabled us to develop strong relationships with other professionals such as accountants, lawyers and financiers, as well as and importantly assist business owners and individuals in this region who may get into financial difficulty. Having a very strong and keen interest in what happens in the region also helps us to understand the factors that can affect SME businesses as well as individuals.
To further build on our presence and focus in the GWS region, we are excited and pleased to announce the opening of our South West Sydney Office at Narellan. As with our Norwest Business Park Office, the new Narellan office puts us closer to fellow professionals and SME businesses and individuals when they need expert insolvency, restructuring or bankruptcy advice in South West Sydney. We believe this proximity and not “the ivory tower” approach is what such stakeholders are seeking when looking for specialist advice in corporate and personal insolvency and restructuring.

Our continued and sincere focus throughout the GWS region reflects the importance we place on ensuring that SME businesses and individuals in this region get the “right advice” when they may be in financial difficulty. Jones Partners are a Chartered Accounting Firm that specialises in the provision of corporate and personal insolvency and restructuring services. For more information go to jonespartners.net.au

Small Business Survival Tips

On 28 August 2013, I hit the airwaves on Eagle Radio – which is Australia’s first and only radio station dedicated to empowering small businesses. As an Insolvency Practitioner that specialises in advising small to medium sized businesses when they are in financial difficulty I highlighted what are the key ingredients that keep a small business afloat. Unfortunately many small businesses don’t make it through the early years of their commencement and can end up in liquidation.
There is no doubting that small business is a vital ingredient as part of a thriving Australian business community. Running a small business carries risk, but also enormous opportunity if managed correctly. Click on the link below to listen to the interview.

Radio Interview

If would like to discuss any aspect of the interview, please don’t hesitate to drop me a line.

All the best.