Why does the ATO Bankrupt people with a Tax Debt?

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Why Bankruptcy instead of a payment plan?

This is a question many if not all business people with tax debt ask, and has caused many businesses to be wound up and people to be bankrupted. I'll explain, as there are a few conflicting reasons to understand. Lets start with the underlying directives in relation to business and tax debt.

Tax Debt Policies

  1. Governmental policy dictates fostering a competitive environment in Australia.
  2. It is illegal for an insolvent entity to trade.
  3. Tax as a debt is to be sought to be repaid along with managing future tax commitments.

ATO Accounts that show your tax debt

There are a  number of different tax accounts that each entity has with the ATO. Its worth noting that if you are a director of a company, or have a trust involved you may have the below accounts for each entity:

  • Integrated client account - ICA
  • Income Tax Account - ITA
  • Legal Account - only if an account is within a legal process.
  • Superannuation Account - only if a debt is held.
  • Not economical to pursue - this is a hidden account of which you will need to speak to the ATO to obtain a balance.

If you receive an account from the ATO please keep in mind in most cases it will only highlight a single account. The only true way to understand your entire tax debt under all of your entries if to obtain a tax portal statement showing account balances for all accounts.

Why Bankruptcy by the ATO Summary

Now lets try to combine the information above in a way that is easy to understand.

  • Point 1 above says foster a competitive environment in Australia, hence if a debt is increasing and no payments are made to your account, then your business is viewed as detrimental to the competitive environment or viewed as insolvent. This is because when you quote on work, your quotes potentially can be priced up to 30% less than your competitors which mean you would win jobs from compliant businesses.
  • It is very likely your business would be wound up under insolvent trading legislation (point 2)
  • The ATO would pursue a bankruptcy to recover the tax debt (point 3) unless paid back. The bankruptcy would allow a trustee to investigate your asset position with a view to selling assets and paying back creditors.

In any of these cases above, there are methods that may reduce tax debt, facilitate payment arrangements, and /or assist in a solution. However, each solution to a business wind up or bankruptcy involves investigation to source a solution. We highly recommend contacting us at your earliest opportunity to discuss your tax debts and any potential solutions. We can be contacted via phone or our enquiry form below.

Let's talk about a solution that suits you