The ATO can ask the court to wind up a company that hasn’t paid its tax debts. This is a serious step by the ATO, and is not usually taken lightly.

The ATO’s debt recovery processes usually start with a discussion about the tax debt, and a request that you propose a payment plan. If this isn’t done, or payments are not made as agreed, then other steps may be taken such as issuing garnishee notices or director penalty notices. The ATO can also serve a statutory demand on the company, which is the first step towards the ATO seeking to wind up the company.

Serving a statutory demand

A statutory demand can only be served for debts over $2,000, and requires that the company either enters into a payment plan or pays the tax debt in full within 21 days.

A statutory demand is served on the company by leaving it at the registered office, sending it by post to that office or delivering a copy personally to a director of the company who resides in Australia.

Setting aside a statutory demand

It is possible to apply to set aside the statutory demand, though there are limited grounds on which this would be possible. Any application to have the statutory demand set aside must be made within 21 days of the demand being served.

One option is that there is a defect in the statutory demand, however, the defect must be so serious that it would cause ‘substantial injustice’ if the demand were not set aside. Whilst it is always worth having a statutory demand reviewed by a lawyer to check for defects, it is rare that a demand is so defective that it will be set aside.

Another option that companies usually have for setting aside a statutory demand is when there is a genuine dispute as to the debt. Unfortunately, this option is generally not available for statutory demands issued by the ATO. This is because tax debts have a special status; the tax law says that the very fact that an assessment has been issued is ‘conclusive evidence’ that the debt is owed.

Winding up the company

If the debt under the statutory demand is not paid within 21 days and no other arrangement has been reached with the ATO, then the ATO can apply to the court to wind up the company. If the company has failed to comply with the statutory demand in the three months before the application is made to the court, then the court must presume that the company is insolvent.

Once a winding up application has been made, it can be difficult to save the company, and careful negotiation with the ATO is required. Though the decision to wind up the company is ultimately one for the Federal Court, it is possible to reach an agreement with the ATO and then have the winding up application withdrawn.

These articles are not legal advice; they are a brief summary of a complicated issue.