The Australian Taxation Office, or more correctly the Federal Commissioner of Taxation (“the Commissioner”), is no ordinary creditor. The Commissioner doesn’t supply goods or services, doesn’t render tax invoices, and doesn’t close your account when you don’t pay.

The Commissioner’s rights as a creditor do not arise from contract, but from the operation of law, in particular the Taxation Administration Act 1953 (“TAA”).  In general terms, the TAA creates a statutory debt.

The TAA gives the Commissioner little discretion to write off all or part of an unpaid taxation debt. In general, the Commissioner will not accept a “cents in the dollar” proposal on a primary tax debt from a debtor outside of a formal Deed of Company Arrangement or Personal Insolvency Agreement context.

That said, the Commissioner holds a broad discretion under the TAA to consider proposals from taxpayers in difficulty to pay a tax debt by instalments.  The usual terms of such an arrangement are that the instalments are paid on a regular basis, usually fortnightly or monthly, and that all subsequent lodgements are to be filed on time, and all subsequent payments arising from those lodgements are to be paid on time.

Often, as insolvency practitioners we see companies and individuals coming to us who have one or more of these arrangements in their recent past. Part of our job as insolvency practitioners is to assess when the company or individual was insolvent (ie, unable to pay its debts as and when they fell due) for the purpose of pursuing unfair preference payments or pursuing the directors for incurring debts whilst the company was insolvent.

The Full Court of the Federal Court has recently considered whether a company operating under a payment arrangement with the Commissioner was insolvent or not.

In Re Solarshop; Clifton v Kerry J Investment Pty Ltd (trading as Clenergy) [2020] FCAFC5, the Full Court considered in detail the statutory nature of a tax debt, and the legal basis for the Commissioner agreeing to accept payment of a debt by instalments.

In particular, one of the issues before the Full Court was whether an instalment arrangement had been entered into as a separate contract between the taxpayer and the Commissioner, or whether the payment arrangement was one authorised by section 255-15 of Schedule 1 of the TAA.

The Full Court held that despite the slightly loose language of the correspondence between the Commissioner and the taxpayer, the arrangement for payment by instalments was one governed by the TAA (as opposed to by a separate contract) and therefore one must look back to the terms of the statutory debt.

On construction of the TAA, the debt remained due and payable on its original date for payment notwithstanding the payment arrangement, which had a number of consequences – not the least of which that general interest charge (“GIC”) continued to accrue on the debt from the original due date for payment. 

Further, for the purposes of assessing the solvency of the company, it must therefore be that the debt was due and payable as at its original date for payment and remained due and payable until it was paid in full.

This was held notwithstanding the payment arrangement and the Court rejected the argument that the debt should not be taken into account as at that date due to the existence of the payment arrangement.

This has a number of far reaching consequences for all stakeholders in liquidations and bankruptcies.

First, a company is far more likely to be considered insolvent if it had a tax debt due and unpaid for a long time, notwithstanding its compliance with a repayment arrangement. This means that a Liquidator prosecuting preference actions and insolvent trading claims will have an easier task to prove that the relevant company was insolvent.

Secondly, a director is brought face to face with reality when an ATO officer follows up payment of a tax debt. If the director confirms the debt cannot be paid in full but submits a repayment proposal, that director is in effect admitting that the company is insolvent.

The Full Court acknowledged this difficulty at para [517] of its judgment:

One can well understand that directors of a company might find it incongruous that having secured an arrangement for payment by instalments they remain obliged to take the full liability into account when considering whether the company is able to pay all of its debts on a particular date.  At least in the case of contractual debts some latitude in the time for payment might influence the question of whether a debt is due and payable at a certain time: Lewis v Doran at [106]. However, here we are concerned with a debt arising under statute and where the only relevant arrangement as to payment arises in accordance with statutory terms (that is, s 255-5).

Advisors representing clients in repayment negotiations with the Commissioner should take note!