Poor tax compliance history and its effects on a company’s ability to restructure

Avoiding a future insolvency event is a big part of the equation.

We all understand the effects of COVID-19 pandemic on the businesses’ financial viability in the current market. Whether this relates to labour costs increases, increase in material costs, or extensive delays in obtaining materials and resources through delays in production and delivery. Of course, there are many other issues we have all seen in the current marketplace. The silver lining of it all is that at Worrells we’ve seen an increased number of directors and financial advisors interested in a restructure of their companies, in contrast to a winding up through a liquidation.

A formal restructure may be in the form of a voluntary administration (VA) and Deed of Company Arrangement (DOCA). This process is designed to resolve a company’s future by appointing a voluntary administrator to take full control of the company to try to save the company or its business. The main goal of a VA is to administer the company’s affairs to obtain a better return to creditors through a DOCA than if the company had been liquidated. 

A DOCA is a binding agreement between the company and its creditors and usually involves a company’s director (or a third party) making a contribution to form a pool of funds as a return (dividend) to creditors. The company’s creditors must vote to accept (in majority and value) the DOCA proposal for the company and the voluntary administrator to enter into a DOCA.

Frequently, the most common creditor across most VAs, is the Australian Taxation Office (ATO) for unpaid GST, income tax, PAYG liabilities and superannuation guarantee charges (among other statutory obligations). 

The ATO usually assesses the DOCA proposal on various factors, including but not limited to the following:

• Value of the return available to unsecured creditors (cents/$).

• Timing and certainty of the expected dividend to creditors (e.g. is the proposed contribution by the director/third party realistic).

• Continuation of the company’s business affairs.

• Preservation of the company’s employees and their entitlements.

However, more recently we have seen the ATO consider a more niche factor, the company’s compliance history in lodging its required activity statements, payment of its obligations and engagement with the ATO. Essentially the ATO wants to be satisfied that the relevant company can trade profitably in the future and maintain its obligations in order to avoid a further insolvency event down the track. The easiest way to predict this is to review the company’s compliance history, mainly through the Running Balance Account (RBA) detailing the company’s lodgement and payment history.

If the company’s compliance history is consistently solid, the ATO will have some confidence that this trend will continue into the foreseeable future. Conversely, if the company has a poor compliance history and tends to ignore the ATO’s communications and fails to engage effectively, the ATO may be more reluctant to accept a DOCA proposal unless the company is seeking to rectify these issues.

The moral of the story: your compliance history may play a major role in your ability to restructure in the future. Stay tuned for Part 2!

Positive options start by having a conversation. Contact us to find out how we help you put difficult financial challenges behind you and put the business on another path.