What are the dangers of granting the ATO security as part of a payment arrangement?

The ATO is open to taxpayers approaching them to negotiate a payment arrangement. If you or your business is unable to keep up with tax debts, this is an option for you. If the ATO refuses to enter into a payment arrangement, it is then an option for you to offer the ATO security to support the request for payment arrangement. In some cases, the ATO will request that you provide security to support a payment arrangement.

We have previously written about how we helped our clients negotiate payment arrangements. Here is an example of one of them.

How is security provided to the ATO?

You can offer the ATO or sometimes, the ATO will ask that you provide security. The most common form of security will be a mortgage, usually:

• over a director’s property if it is a company’s tax debt. The ATO will also require that the director provide a personal guarantee as the director is likely not liable for the company’s tax debt; or

• over the property of a taxpayer if it is a personal tax debt.

What are the dangers?

The obvious danger would be the ATO taking steps to sell the assets it has security over if the taxpayer fails to pay the ATO debt. This includes the ATO taking possession of a house or any other real property and sell it.

In respect of directors, directors ordinarily are not liable for company tax debts, unless the ATO has issued a Director Penalty Notice. If a director guarantees the company’s tax debt however, the director will be liable if the company fails to pay. If the director has mortgaged their house as security, the ATO will ultimately sell the house if the company fails to pay the tax debt.

Case Study

We recently took on a client who was running a cleaning business. The client had provided a personal guarantee over $500,000 of company ATO debt, and also granted the ATO security over a few of his properties.

While the company was insolvent at the time security was granted, he was hopeful that he could turn the business around. His plans to turn the business around ultimately did not materialise. When he contacted us for assistance, the ATO debt had reached more than $600,000. The client had also owed large amounts to debtor financiers and short-term lenders. Unfortunately for him, there were no other options to save his company.

Due to the security granted to ATO over his properties, his properties had no equity. If he had not granted security to the ATO, he could have used to equity to pay some of the debts which he had guaranteed. As both he and his company were insolvent, his only option was to place his company in liquidation and declare bankruptcy.

It was an unfortunate ending and one that we would like to avoid. Where possible we would like to assist clients in solving their issues without an insolvency appointment. In this care however, the ATO guarantees and mortgage left the client with no choice.

How we can help

If you cannot pay your debts and would like to better understand the potential consequences and the options available, please contact Pearce & Heers at our Brisbane or Gold Coast offices for an for an initial, obligation-free consultation.