If you owe an ATO debt you can’t pay, you can seek to negotiate a payment arrangement with the ATO. If the ATO refuses to enter into a payment arrangement, then it may be an option to offer the ATO security to support the payment arrangement. Or, in some cases the ATO may ask a taxpayer to provide security to support a payment arrangement.
We have previously written about various issues with security being granted for ATO payment arrangements here.
How does the ATO take security?
The ATO will either ask you to provide security or you can offer it, with the most common forms of ATO security being mortgages, usually:
- Over a property owned by a taxpayer with a personal tax debt; or
- Over a company director’s property where a company owes a tax debt. However, to do this the ATO will also obtain a guarantee from the company’s director, as the director is probably not liable for the debt.
What are the risks?
If you grant the ATO security and don’t pay them then they can take action to sell any assets they have security over. This includes taking possession of a house or other type of real property and selling it.
In regard to company directors, a director is ordinarily not liable for a company tax debts. This is unless the ATO has issued the director with a Director Penalty Notice. However, if a director guarantees a tax debt and the company doesn’t pay it then the director is liable. And if the director has given the ATO a mortgage over his or her house the ATO will ultimately sell the house if the tax debt is not paid.
Problems encountered by a recent client
We were recently contacted by a client who was a director of a cleaning business. About two years prior to contacting us the client had guaranteed an ATO debt of over $500,000 and granted the ATO security over a number of properties he owned.
The client’s company was insolvent at the time he guaranteed the ATO debt but he thought he could save it. However, he ultimately couldn’t and when he contacted us the ATO debt had climbed to over $600,000 plus the client owed amounts to debtor financiers and short-term lenders. And unfortunately for him, there was no option available to save the business.
Because our client had guaranteed the ATO debt and given the ATO security, he had no equity in his properties. If he hadn’t done this, he could have used the equity to pay certain creditors he had guaranteed. But because of the ATO mortgages, he couldn’t pay these creditors and we advised him that he had no options other than to place his company into liquidation and then go bankrupt.
Now that’s advice we don’t like to give and where possible we like to work with clients to solve their problems. But because of the ATO guarantee and mortgage there were no solutions in this case.
What should you do?
If you have a tax debt you should get professional advice. This is especially important before granting the ATO any type of security.
Contact us for assistance
We are happy to talk to you about your tax debt problems, including whether or not granting security for an ATO payment arrangement may be an option.