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Company directors get ATO warning on unpaid taxes

Directors of struggling companies need to keep a tight rein on payments to the Australian Tax Office because of personal liability for the debt if the company does not pay or becomes insolvent.

Company directorsThe recent introduction of new laws to fight Phoenix activity has strengthened the power of the Tax Office to fight payment avoidance.

Directors of companies can be personally liable for tax payments –“existing and future tax liabilities” which could also cover other amounts such as GST, company income tax and superannuation. And while these new laws will curb Phoenix activity, there are still legitimate businesses struggling to pay their taxes.

Contrary to commentary that all sectors survived well during the global financial crisis, many medium and small businesses have suffered and are still suffering. The ATO allowed businesses to enter into payment arrangements during the global financial crisis.

And they have.

But the amount currently owed to the ATO as of December 31, 2009 by businesses and households is a staggering $12.27 billion – up by $1.3 billion in just 18 months, of which $10.18 billion is owed by business, according to the ATO’s annual report. And total debt (debt holdings) owed by all taxpayers – including businesses, disputed debt, tax owed by insolvent businesses and bankrupt individuals was $24.5 billion. Cases (businesses and non-businesses that could not pay) increased from 1.31 million to 1.34 million to June 30, 2009.

While the ATO has been lenient towards struggling businesses, particularly during the height of the financial crisis, this will not always be the case.

The Commissioner of Taxation Michael D’Ascenzo recently told the Council of Small Business Organisations of Australia summit in Brisbane that firmer action will be taken with those who have escalating tax debts or are unable to meet their outstanding tax or Superannuation Guarantees.

As of December 31 2009, there were 147,599 payment arrangements in place for businesses. The ATO was only responsible for 5.6 percent of wind-ups and bankruptcies in 2008, and two per cent in 2009, he said. While much of this can be attributed to the global financial crisis, Mr D’Ascenzo explained, the danger is a further worsening of the economic outlook, which would increase debts to the ATO and put directors under more pressure.

The ATO will also be under pressure from Treasury to chase tax debts owed. And this is not good news for companies already in financial trouble.

ATO Deputy Commissioner Steve Vesperman affirmed this by stating “in balancing our assistance and support for those who are willing to engage with us, we are taking firmer action with those businesses who demonstrate an unwillingness to work with us, have escalating debts or who are unable to meet their outstanding tax or superannuation guarantee debts”.

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