Pearce & Heers were recently engaged by a restaurant owner on the Sunshine Coast, whose company was facing liquidation proceedings by the ATO. The ATO had rejected a number of proposals for payment arrangements put forward by the company in the past.
Background and Initial Meeting.
We had an initial meeting with the client whereby he indicated he might want to arrange for the sale of the company’s business to a related entity prior to liquidation. This type of transaction is commonly known as a phoenix transaction and may or may not be legal depending on how it is carried out. We reviewed the company’s circumstances with the company’s director and discovered:
- The company owed approximately $280,000 to the ATO in PAYG Tax and GST;
- The company owed the ATO a further approximately $70,000 in unpaid superannuation which is payable to the ATO as Superannuation Guarantee Charge;
- The company was up to date with its rental obligations however the director had personally guaranteed the lease;
- The company had limited other creditors other than the ATO;
- The company had assets which would have been worth about $20,000;
- The company’s director had suffered very serious health problems which he had recently overcome; and
- The director owned a property, which was on the market for sale.
We considered the options available with the company’s director including:
- Selling the business to a related entity by way of a phoenix transaction;
- Letting the ATO wind up the company either after a business sale or prior to a business sale. If the liquidation occurred prior to a business sale, they could consider making an offer to the Liquidator to purchase the business; or
- Negotiating a payment arrangement with the ATO.
Course of Action Chosen
We suggested to the company’s director that entering into a phoenix transaction or letting the company be placed in liquidation were not the optimum courses of action available, as:
- The director was liable under the ATO’s director penalty provisions for a significant amount of the PAYG Tax and superannuation owed by the company, totalling over $200,000;
- The director had guaranteed the company’s lease and he would be liable for (possibly) significant amounts to the landlord if the company was placed in liquidation and it was still a party to the lease;
- There would be negative stigma associated with a phoenix transaction / business sale; and
- There was a risk that the director may have breached his duties if he entered into a phoenix transaction / business sale so close to the likely date of liquidation of the company.
We suggested to the director that he use the proceeds from the sale of his property to make a contribution to a payment arrangement to the ATO. The director chose to proceed with this course of action. We proposed to the ATO whereby they would agree to the director paying an amount of $200,000 to them within two months, with the balance of their debt being payable over approximately 18 months. As part of this request we informed the ATO of the director’s health problems (along with providing evidence) and requested the ATO write off interest and penalties during the period of the director’s ill health.
The ATO agreed to the Pearce & Heers’ proposal and agreed to write off slightly more than $47,000 in interest and penalties on its PAYG Tax and GST debt. The ATO, via its solicitor also adjourned the winding up application for two months so that the first payment could be made.
This was a great result for the director as it gave time to sell his property, avoided personal liability and the negative stigma which would have been involved with a phoenix transaction and resulted in the ATO writing off a significant part of its debt.
Contact us for advice
If your business has a tax debt and you would like to consider all options, which may be available, please get in contact with Pearce & Heers for a no-obligation meeting.