Company directors are at risk of being held personally liable for tax debts if they allow their businesses to continue trading while in an insolvent state, warns Roger Mendelson, a debt collection expert and CEO of Prushka.
He notes that the Australian Taxation Office (ATO) is currently owed almost $18 billion, with small business taxpayers accounting for more than 60 per cent of this debt. To meet this challenge, the ATO is reviewing its debt recovery options with collectors to deal with bad payers.
Mendelson says not paying ATO debts is a dangerous game, because the ATO has powers far greater than other business creditors.
“For starters, overdue tax is subject to penalty interest rates which are higher than standard bank interest (currently 9.59 per cent) and the ATO interest is not tax deductible, whereas bank interest is.
“For tax debts against individuals exceeding $5,000 the ATO has a general policy of proceeding to bankruptcy, even if it may not be commercially viable to do so. The reason being is that it then effectively passes the power to the trustee in bankruptcy to flush out any assets which have been improperly disposed of or may form part of the bankrupt estate.
“For company tax debts, the ATO is the major petitioning creditor for wind up of companies.”
Mendelson says the ATO has powers to pursue directors of failed companies personally, in circumstances which go well beyond the powers of others creditors. For example, directors who allow a company to trade while insolvent face a real risk of becoming personally liable for unpaid tax debts of the company.
He adds that businesses which have outstanding tax debts generally operate poor financial systems and controls and this usually means that billing and collection of their own accounts is handled poorly.
As part of the solution, these businesses need help to set up and operate tight billing and collection systems to prevent further problems down the track.
Mendelson advises business owners to take the following steps to protect themselves from incurring debt and get their cash flow back on track in 2014:
- Be proactive in your own debt recovery. Do not wait until tax time or when it begins to pile up – get ahead with your finances.
- Ensure your trading terms are set up so that any debt recovery costs are covered by the debtor. This will make it far easier for you to recover money owed.
- Go through old written off accounts and refer them to a collection agency which is prepared to take them on. The longer a debt is left, the harder it is to recover.
- Any business that is unable to pay its tax debts needs to seek urgent help from an accountant in order to come to an arrangement with the ATO quickly. If the position is severe, help should be sought from an insolvency practitioner.
- Directors who allow a company to trade while insolvent face a risk of becoming personally liable for unpaid tax debts of the company.
Already a member?
Login to view this content