ATO ALERT
Michael Carrafa Executive Director | Melbourne
Now, more so than ever before, the Australian Tax Office (ATO) is forcing the hands of directors to decide on the future direction of their company’s affairs.
The current reports are that the ATO is looking to reduce around $50 billion worth of debt, with about $34 billion owing to the tax office by small businesses.
As insolvency practitioners, we are witnessing first-hand the issuing of Director Penalty Notices (DPNs) by the ATO daily. Historically, DPNs were only reserved for debts where there had been clear and deliberate tax avoidance, or there was some other compliance reason justifying their issuance. The Deputy Commissioner of Taxation (DCT) is now issuing DPNs as a matter of course where a small business has an outstanding debt. DPNs are serious and have immediate consequences.
We encourage our network to immediately review their client records/database to ensure that their registered office is up to date with ASIC and to ensure client director address details are updated on the ASIC database. The ATO can rely on information in the ASIC database held for the company or a director when deciding which address to issue a DPN to (s.269-50). We have seen numerous situations where DPNs become locked down because they were posted to an old address, which was not updated on the ASIC database.
Without sounding like a broken-down record, the reporting of amounts for GST, PAYG and SGC by way of BAS, IAS and SGC is critical to minimise personal exposure to current and former directors.
If your client receives a DPN, they have 21 days to respond to it. The 21 days starts from the date that it is posted by the DCT, which invariably will be the date of the notice: s.269-25(4). By doing nothing and not acting in time, it becomes a parallel debt – both director and company owe the debt.
If a DPN is not complied with, the DCT can immediately take steps to enforce the debt such as issuing a garnishee notice or commencing proceedings. By not responding in the 21 days, any components of the DPN that were not locked down become locked down and the only available way to defend a DPN is by having a valid defence or otherwise proving a defect with the notice.
It is critical to also note the following:
• Check the amounts in the DPN to ensure they match with the Company’s records – having seen many DPNs you will need to understand why amounts for a particular month/quarter may appear in both Columns 4 & 5;
• DPNs can be based on estimates if amounts are not reported. This may create further headaches for company directors.
If you need to discuss client concerns regarding DPNs, please do not hesitate to contact us.
Patrick Quigley Associate Director | Townsville
Patrick brings over a decade of experience in corporate insolvency including voluntary administrations, liquidations, receiverships, court appointed statutory trustees as well consulting work for the public sector. Welcome Patrick!
WHAT IS A GARNISHEE ORDER AND HOW DOES IT WORK?
Rebecca Patel - Manager | Brisbane
What is a Garnishee Order?
A garnishee order (different from an ATO garnshee notice) is a court order that allows a creditor to recover debts through third parties, such as the debtor’s employer or bank. The third party is referred to as the garnishee. The garnishee is required to pay a lump sum or instalments to the creditor until the debt is repaid in full.
For the creditor (known as the “judgement creditor”), a garnishee order is an effective way to recover a debt where the debtor has failed to take steps to repay the amount. Garnishing monies from third parties removes the need to recover the debt directly from the debtor.
How Does a Garnishee Order Work?
A garnishee order is made against third parties that owe money to the debtor, or who hold money on the debtor’s behalf (such as banks, employers and customers).
Garnishees are required to make payments to the judgement creditor (as a lump sum or instalments) until the judgement debt is fully paid.
There are two broad categories of garnishee order:
• Garnishee Order for Wages or Salary
These orders are issued on the employer of the judgement debtor. Under the order, the employer is required to withhold a portion of the debtor’s wages until the debt is satisfied.
Garnishee orders for wages must leave the debtor with a reasonable weekly income. In New South Wales, a garnishee order must not reduce a debtor’s net weekly wages to less than $587.50 per week (as at April 2024).
In Queensland, a Registrar must be satisfied that the garnishee order will not materially prejudice the debtor’s ability to pay reasonable expenses and liabilities. This amount may vary in other states and territories.
• Garnishee Order for Debts
A garnishee order for debts can be issued on banks, financial institutions and other parties who hold money on behalf of the judgement debtor (such as customers and tenants).
Garnishee orders for debts are typically satisfied as a lump sum payment. Banks and financial institutions are usually required to leave a debtor with a certain amount of money in their bank account, subject to what is stated in the garnishee order.
Payment of the debt is generally expected to be made within 14 days of
the order being served (depending on the State or jurisdiction).
Creditors are permitted to issue multiple garnishee orders if a single order is insufficient to recover the judgement debt. For example, a creditor that is owed a large debt may garnishee wages, savings and monies that are paid to the debtor during the sale of an asset, such as their home.
Garnishee orders are managed by each Australian State and Territory. Speak to an adviser to understand the relevant details for your region.
Who Can Be Served a Garnishee Order?
Garnishee orders are served against parties that owe money to, or hold money for, the judgement debtor. This includes:
• Employers owing wages and/or salary to the debtor
• Banks with accounts in the debtor’s name (the bank is required to locate all relevant accounts)
• Investment accounts in the debtor’s name (if the account has not matured, the garnishee order will remain until the account reaches maturity)
• People or businesses who owe money to the debtor (e.g. tenants and customers)
• Parties who will owe money to the debtor in future
• Superannuation funds (the garnishee order does not become effective until the superannuation benefit is payable)
• Life insurance policies (the garnishee order does not become effective until life insurance monies are payable)
• Solicitors, accountants and other professional service providers who hold money in trust for the debtor
• The proceeds of sales (e.g. if the debtor sells a property, the judgement creditor may issue a garnishee order to the purchaser)
Garnishee orders can also be issued against third parties who received a payment from the debtor prior to the order.
The creditor cannot issue a garnishee order against joint bank accounts.
What to Do if a Garnishee Order is Made Against Your Debt
As the judgement debtor, the garnishee order will not be served to you directly, but there are several ways you can navigate the situation. You can:
• Pay the debt in full. If you are able to do so, paying your debt in full will stop the garnishee order immediately.
• Negotiate with the creditor. Debtors are permitted to negotiate more manageable repayment terms with the judgement creditor. You can contact the creditor or their representative. This may involve offering an alternative repayment schedule, reducing the judgement sum or setting up a payment plan.
• Apply to the court for an instalment plan. If you are experiencing financial difficulty and the judgement creditor is unwilling to negotiate, you can apply to the court for an instalment plan. The court may reject instalment plans if it will take too long to repay the debt.
• Declare bankruptcy. Most garnishee orders will cease if you declare bankruptcy. The remaining amount of your debt will be included in the bankruptcy, and the judgement creditor will receive a dividend as normal. Bankruptcy should be considered as a last resort.
Courts make an effort to ensure garnishee orders are reasonable and that the debtor is left with sufficient income to afford modest expenses.
If a garnishee order is made against your debt and you are experiencing disadvantage or financial hardship, you can apply to the State or Territory authority to approve full or partial refunds of monies that have been garnished. This may occur if you experience a hardship such as medical expenses. You will be asked to provide evidence of hardship if you are applying for a refund of garnished monies.
ATO Garnishee Notices
Creditors are not the only parties that can issue a garnishee order. The Australian Taxation Office (ATO) may also issue a garnishee notice for unpaid tax debts. Under the Taxation Administration Act 1953, the ATO can issue a garnishee notice without the need for a court order. As with garnishee notices made by creditors, orders may be served to employers, banks, financial professionals and anyone who owes money to the debtor.
ATO garnishee notices are not included in bankruptcy if they are issued prior to the appointment of the Trustee.
Do Garnishees Need to Comply with Garnishee Orders?
Garnishees have a legal requirement to comply with the terms of a garnishee notice.
The creditor can apply to the court to make the garnishee liable for the amount of money to be recovered if they fail to meet the terms of the garnishee notice.
Garnishee Order vs Bankruptcy Notice
Creditors are provided several options to recover monies they are owed. In many cases, garnishee orders provide better returns to creditors than bankrupting a debtor.
Garnishee orders are also the preferred method of retrieving money because they do not rely on the debtor to repay a debt. Instead, money is taken straight from the debtor’s sources of income. Garnishing wages is an effective way to recover small debts. Garnishing bank accounts is the better option for creditors wanting to resolve the situation quickly.
If an individual owes you $10,000 or more, and you are unable to recover their debt through a garnishee order, you may apply to the court to make
them bankrupt. This typically provides low returns, but it may be the best course of action. Bankrupting a debtor should be a last resort. Speak to an insolvency practitioner for professional, objective advice and to assess all available options before proceeding.
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SMALL BUSINESS RESTRUCTURING
TAX IMPLICATIONS
With the increasing number of appointments for Small Business Restructuring (SBR), driven by the Australian Taxation Office's (ATO) initiative to recoup more than $50 billion worth of debt (small businesses accounting for about 65% of the collectable debt), directors facing stricter tax compliance deadlines and Director Penalty Notices (DPNs), are appointing external administrators at materially heightened levels, including Small Business Restructuring Practitioners (RP).
This article delves into the tax consequences associated with an SBR appointment.
Outstanding tax lodgement
Prior to creditors receiving a restructuring plan offer (usually within 4-6 weeks after the SBR appointment), the ATO typically requires:
• Submission of all outstanding Activity Statements (IAS, BAS and superannuation lodgements), including an interim BAS for the period in which the SBR commenced.
• Lodgement of any overdue prior year Income Tax Returns (ITR).
Directors can also file the company’s ITR for the past financial year (if still pending) and part of the current financial year. Any tax debt from these filings (IAS, BAS, ITR) is part of the preappointment debt to be dealt with through the restructuring plan offer.
Following the SBR appointment, the ATO establishes new Client Activity Centres (CACs)
to separate debts incurred before and after the appointment, making it easier to manage future obligations. These new CACs are why business owners typically receive a letter in the mail advising that the business' pre-SBR GST registration has been cancelled. Another way business owners may think of this issue is that it allows the ATO to “draw a line in the sand” (so to speak) when determining what debts form part of the SBR.
Related party creditors forgiving debt before SBR plan acceptance
Related party debts cannot vote on an SBR proposal issued to creditors. Typically, we find that the ATO may require a related party to agree to forgive debts owed to it by the company, before the ATO will agree to the SBR plan. This may arise where the related party stands to receive a material dividend under the Plan, to the detriment of other creditors (like the ATO).
As a result, related parties may choose to forgive this debt, however, it should be noted that this might create a deemed dividend under Division 7A. Appropriate advice should be received before undertaking such forgiveness.
SBR tax treatment of written off debt
Once the restructuring plan is completed and creditors have been paid, the company is released from all admissible debts or claims.
Debt written off during the restructuring plan is considered non-assessable non-exempt (NANE) income, exempt from inclusion in the
income tax return, and no tax is paid on the write-off amounts.
For creditors writing off a part of their unpaid debt through the SBR, debt forgiveness rules may apply, leading to a revenue or capital loss for the creditor.
Carried-forward tax losses after completion of restructuring plan
When the restructuring plan is completed, ‘forgiven’ debts are subject to commercial debt forgiveness rules. These regulations outline the priority for utilising the forgiven amount to offset various tax balances, following this order:
1. Tax losses
2. Net capital losses
3. Certain un-deducted revenue or capital expenditures
4. Cost bases of certain CGT assets
However, if both the company and creditor share common ownership, the forgiven amount may be reduced if the related party creditor agrees to forego their revenue deduction or capital loss.
These commercial debt forgiveness rules don't apply to tax-related debt, so tax losses or other ‘tax balances’ remain unaffected when ATO debt is partially forgiven following the plan.
It's important to note that individual circumstances vary, and tailored tax advice is recommended for each case. Consulting with a professional to devise a specific strategy is advisable before taking action.
2024 SV PARTNERS NORTH QUEENSLAND LAW ASSOCIATION CONFERENCE
On the 24th-25th May, Townsville Director Michael Brennan headed to The Ville Resort-Casino on behalf of SV Partners as the Naming Rights Sponsor for the North Queensland Law Association Conference in Townsville.
Matthew Hudson - Associate Director | Brisbane
ANYONE?
BANKRUPTCY AS A WEAPON IN FAMILY LAW
Malcolm Field - Director | Perth
My mother always said there was no place for firearms in the home. Rather than acting as a defensive tool, the risk is too high that a gun gets into the wrong hands and the wrong person gets hurt.
Ok, a crude analogy and not well quoted. Perhaps the sledgehammer to crack a nut is closer to the mark, but either way our office is seeing a spate of bankruptcies initiated by debtors seeking to:
1. Avoid matrimonial liabilities or at least cap them out; and
2. Achieve a split of jointly held matrimonial assets (house equity) without having to incur the out of pocket costs and timeline associated with the Family Court.
In each of our three recent files, the:
• debtor (also referred to as the bankrupt) had petitioned their own bankruptcy via the government office and the Official Trustee (AFSA) transferred the estate to me as a Private Trustee i.e. I had not met the bankrupts before the bankruptcies so no advice/recommendation was obtained from me around this strategy;
• unsecured debts were under $30k but there was also a mortgage to be serviced;
• share of house equity estimated by the bankrupts at less than $100,000 and each was increasing on the back of rising house prices.
Where property is jointly held, it is the practice of most Trustees to confer with the nonbankrupt spouse as to their interest, if any, to
acquire the bankrupt estate’s share of the equity in a home. It’s often a sensible way for the rest of the family to keep a roof over their head, avoiding removalist costs, stamp/transfer duty and financing costs in the event that the family is able to support a new bank application for funding (without relying upon the bankrupt’s income for application purposes) that would apply to a new property purchase.
Much as the starting points were similar, the outcomes were quite different.
Back to the outcomes:
In the first case, the non-bankrupt ex-spouse (NBES) was not supportive of a timely market sale and intended to oppose any application to the court seeking orders for sale. After conferral about a number of disputes between the parties (including insurance claim proceeds), she did however agree to purchase the equity through a payment plan involving some upfront amount and the balance over 36 monthly payments. The costs of the estate were exacerbated ($60k+ incl trustee and legals) by a range of complexities including interests in numerous deceased estates. The bankrupt has been discharged from bankruptcy but his estate is continuing.
In the second case, the NBES did not engage on my house equity correspondence and absent repayments toward the mortgage, the bank took possession of the house and achieved an excellent sale outcome. We kept our costs to $15,000 for the year that we were involved, overseeing payout of the creditors’ claims, annulled the bankruptcy and
paid a surplus of over $60,000 to the former bankrupt including a reimbursement to her by the NBES for funds she had put into improving the home and an extra contribution to support their child’s maintenance. A great result from humble beginnings.
In the third case, the NBES was agreeable to a sale of the house and he even put in the extra effort to prepare it for sale to achieve an optimal sale result. That sale has just settled in the last few days and preliminary indications are that the bankruptcy will be annulled in the next fortnight with a surplus in the vicinity of $80,000 payable to the debtor (former bankrupt) i.e. after Trustee costs of approximately $20,000.
On balance, two out of three is arguably a pretty good outcome, though the points remain that:
• bankruptcy, even when initiated through the government office, is not necessarily a free service and may indeed end up being more costly than engaging a lawyer and working through the issues in the Family Court (if needed);
• Bankruptcy Trustees may be able to achieve a more timely and less costly outcome, but the reality is that these cases turn on their facts; critically how the NBES engages.
If you have a situation where you would like to explore bankruptcy to deal with debt and also potentially as a means to achieving an asset split, please reach out to your local SV Partners office to discuss what is possible but also the potential pitfalls. Engaging professional advice early on can save a lot pain down the track.
Congratulations to Brisbane Director, Terry Rose, who celebrates 20 years with the firm this month.
Terry joined SV Partners as a Manager in 2004 and ascended to the role of Director in 2007. He has been a cornerstone of our success and his unwavering dedication, exemplary work ethic, and steadfast commitment to excellence have been pivotal in helping to build the firm SV Partners has become.
Terry's professionalism, leadership, and passion for his work has left an indelible mark on our operations and culture, influencing and inspiring colleagues company wide.
On behalf of all at SV Partners, congratulations Terry, on this significant milestone. We wish you many more years of continued success.
The SV Partners SA team have moved to: Level 2, 81 Flinders Street, Adelaide SA 5000
IAN PURCHAS ON SKY NEWS
Sydney Director Ian Purchas joined Ross Greenwood and John Winter on Sky Business News on April 7th to discuss the latest insolvency trends and challenges facing businesses across the country.