That payment plan has a sting in its tail!

Obtaining extended payment terms with key creditors or suppliers is common when a company is having a cash flow problem. The strategy is used formally and informally. Informal is when payments are simply delayed and the director relies on the creditor’s goodwill while cash is being sourced. A formal extended payment strategy is an arrangement that is documented and agreed to by both parties. It has the additional benefit of enabling the director to argue that the company is currently solvent. This is because the debts that were due now are not. The debts the subject of the formal arrangement are now due in the future.

The same cannot be said about payment plans entered into with the ATO. If you request and secure a payment plan with the ATO, it is likely that the corresponding debt is still due and payable[1], hence the sting in the tail. Deferrals of the due date are possible and confirmed by the Commissioner in writing[2], however, these concessions appear to be granted only in uncommon circumstances such as natural disasters, serious illness where no other person can make the tax debt payment, access to the funds being legally impeded (eg. probate not granted, a court decision), or embezzlement[3]. They are not easy to obtain.

This special rule with ATO payment plans matters because it means that you have not legally changed the due dates of your company’s ATO debts. The arrangement may appear formal to you because it is confirmed in writing but, as directed by legislation, it is not. It is not like the formal agreements with suppliers referred to above. If the company goes into liquidation, a liquidator will potentially be able to go back to the date the ATO debt was originally due in assessing when the company became insolvent. This may give rise to the finding that the company traded whilst insolvent for an extended period, with the consequence of a sizeable insolvent trading claim against you as the director.

Now compare this outcome to a scenario where the company enters into a formal plan with supplier ABC only and not with the ATO. The payment plan begins on the same date as the ATO payment arrangement discussed above. As the due dates of the payments to ABC have been deferred by mutual agreement, a liquidator would not be able to rely on the non-payment of ABC’s original debt as evidence that the company is insolvent. Insolvency, if it occurs, would be at some point afterwards. The period of insolvency would therefore be shorter, and all other things being equal, your exposure for insolvent trading would be reduced. For further clarity, we visually compare the ATO payment plan to the formal plan with ABC below:

ATO payment plans are not difficult to obtain and are used often. The sea of negative arises when you employ them as part of managing your cash flow without the awareness of what such an arrangement legally means. This can matter a great deal if things go wrong and the company fails. The positive arises from being forewarned and being able to incorporate that information in your decisions.

If your company is in financial difficulty and you are considering options, one of your actions should include a conversation with us. There is no charge and the discussion will help you frame the problem, the constraints in solving it, and the legal and commercial strategies to mitigate loss. Contact us to arrange a discussion. Our goal is to develop a path out of the sea of negative you may find yourself in.

[1] Per section 255-15(2) of the Tax Administration Act 1953.

[2] Ibid, section 255-10.

[3] Para 33, PS LA 2011/14.