ATO chasing debts post-COVID: risks of insolvent trading

The Australian Taxation Office (ATO) has started enforcing repayment of debts again after temporarily halting its pursuit of unpaid taxes while Australia was grappling with COVID-19 outbreaks and lockdowns.

The ATO, which was owed a record $55 billion at the end of June 2021, will recommence enforcement actions as restrictions ease and businesses activity levels increase post-pandemic.

Companies and their directors who failed to lodge their tax returns or pay tax on their employees’ superannuation payments will be “prioritised” and financial penalties for non-compliance are expected to be “more noticeable” in the ACT, NSW and Victoria, the ATO informed The Age.

The ATO’s reinvigorated approach to debt collection may deliver the final blow to businesses that remain fragile in the wake of COVID-19.

What does this mean for businesses?

As many businesses will know, a company becomes insolvent when it cannot pay its debts “as and when they fall due” (s 95A of the Corporations Act 2001 (Cth)). The COVID-19 hiatus period may have created a false sense of security for businesses due to forbearance in payment obligations for taxes, and income received through various Government support initiatives. As the ATO recommences its enforcement activities and Government stimulus packages cease, these deferred obligations may suddenly become due and payable. Thus, the threat of entering insolvency may be a genuine concern for numerous businesses.

Insolvent trading:

Directors have a duty to prevent insolvent trading (s 588G of the Corporations Act). Temporary measures which relieved company directors from personal liability for insolvent trading, enacted by the Government in response to the pandemic, ceased on 31 December 2020. From 1 January 2021, directors who fail to prevent a company from incurring a debt whilst insolvent may be exposed to an insolvent trading claim in any subsequent liquidation of their company.

Directors found in breach of this duty may become personally liable for debts of the company (ss 588J & 1317H), disqualified from managing a corporation for a period of time (s 206C), and/or fined (s 1317G). If the breach involves dishonest conduct, the director may be criminally liable (s 588G(3)).

For all business related queries and concerns, the Business & Commercial team at BAL Lawyers are here to assist.

Join our mailing list

Get in touch