ATO statutory demands, winding up applications and garnishee notices

By Scott Butler

In the fifth of our articles on dealing with the ATO about tax debts, we look at the ATO’s use of statutory demands, winding up applications and garnishee notices to recover company tax debts.

Statutory demands

Service of a statutory demand is one of several avenues available to the ATO where a corporate taxpayer does not pay their tax.

A statutory demand is a formal, written demand from a creditor, issued under the Corporations Act 2001 (Cth) that requires a company to pay a debt. The statutory demand must:

• be in writing in the prescribed form (Form 509H);
• relate to a debt or debts owed by the company to the creditor that are due and payable and total at least the prescribed amount, which will generally be $2000^[1];
• specify the debt and its amount;
• require the company to pay the amount within the prescribed period (which will generally be 21 days)^[2] after the demand is served;
• be signed by or on behalf of the creditor; and
• unless the debt is a judgment debt, be accompanied by an affidavit that verifies the debt is due and payable by the taxpayer and complies with the court rules.^[3]

Prior to issuing a statutory demand, the ATO will contact a taxpayer by SMS, messages in myGov, letters or phone. Generally, the ATO will revert to a statutory demand where a taxpayer:

• is unwilling to work with the ATO;
• has repeatedly defaulted on agreed payment arrangements;
• does not have the capacity to pay their tax and does not take steps to resolve their situation;
• has been subjected to an audit where deliberate avoidance was detected and payment avoidance continues; or
• appears to be engaging in illegal phoenix activities (where the taxpayer strips and transfers an entity’s assets in order to deny a creditor access to those assets to pay debts).^[4]

The ATO must serve a statutory demand on the taxpayer in accordance with the Corporations Act, such as by leaving the document at, or posting it to, the company’s registered office or delivering a copy of the document personally to a director of the company that lives in Australia.^[5]

Once a statutory demand has been served by the ATO, the taxpayer will have 21 days to:

• ‘satisfy’ the statutory demand by either paying the debt or entering into a payment arrangement with the ATO for the debt; or
• apply to the court for an order that the statutory demand be set aside.^[6]

If a taxpayer decides to make an application to the court to set aside the statutory demand, it must be strictly filed and served on the creditor within the 21 days and be accompanied by a supporting affidavit^.[7] A court may set aside a statutory demand if:

• there is a genuine dispute as to the existence or amount of the debt^[8] which reduces the undisputed amount of the debt to below the prescribed amount;
• the company has an offsetting claim^[9] which reduces the amount of the debt claimed to below the prescribed amount;
• there is a defect in the statutory demand that will cause substantial injustice if the demand is not set aside;^[10] or
• there is some other reason why the statutory demand should be set aside.^[11]

Once the ATO issues an assessment, the amount of the assessment becomes a debt payable. The debt remains payable until the ATO advises, or a court orders, otherwise (even while the taxpayer is challenging or appealing the assessment). If the ATO seeks payment of an assessed amount in a statutory demand, there is generally no avenue to argue there is a genuine dispute as to the existence or amount of the debt.

Once an application to set aside the statutory demand has been filed, the required time for compliance with the statutory demand is extended until after the application has been determined. If the statutory demand is not set aside, a company will have until seven days after the dismissal of the application to comply with the demand, unless the court specifies another period.^[12]

Application for a winding up order

If a company fails to satisfy the statutory demand or make an application to the court for the statutory demand to be set aside within the prescribed period, the taxpayer will be presumed insolvent. The ATO may rely on this presumption of insolvency to apply to the court for orders to wind up the taxpayer.^[13] The application for a winding up order must be filed within three months of the taxpayer’s non-compliance with the demand.^[14] The application must be determined within six months after it is made, unless the court makes an order to extend this time period.^[15]

The court will make a winding up order if satisfied that:

• the ATO has standing as a creditor of the taxpayer;^[16]
• the taxpayer is presumed to be insolvent because of its non-compliance with a statutory demand;^[17]
• the presumption of insolvency has not been rebutted by evidence of the taxpayer’s solvency; and^[18]
• the ATO has complied with all steps required by the rules (such as serving relevant documents on the company, obtaining consent from an official liquidator, lodging notice of the application with ASIC and publicising notice of the application on ASIC’s insolvency notices page).^[19]

It may still be possible to negotiate a payment arrangement with the ATO even after they have filed a winding up application.

ATO garnishee notices

The ATO can serve a garnishee notice on a third party that owes money to, or holds money for, a tax debtor. This notice will require the third party to pay that money to the ATO rather than paying it to, or continuing to hold the money for, the tax debtor.^[20] The ATO is also required to send a copy of the notice to the tax debtor.^[21]

The ATO will consider the following when deciding whether to issue a garnishee notice:

• the tax debtor’s financial position and circumstances and the steps the tax debtor has taken to pay the debt in the shortest possible time frame;
• any other debts that the tax debtor owes;
• whether the revenue is placed at risk because of the tax debtor’s actions (ie paying other creditors in preference to the ATO); and
• the likely implications on the tax debtor’s ability to provide for a family or maintain the viability of a business should the notice be issued.^[22]

A third party must comply with a garnishee notice.^[23] Any amount the third party pays to the ATO under a garnishee notice is deemed to have been authorised by the debtor and the third party is indemnified for the payment.^[24]