ATO tax debt collection differs depending on whether the taxpayer is an individual or a company.

The first few steps are generally the same – phone calls, letters, perhaps a garnishee notice. For a company, the ATO may also issue a Director Penalty Notice to the directors, making them personally liable for unpaid PAYG withholding and superannuation.

The longer a debt goes unpaid, the more likely the ATO is to escalate its debt collection beyond these measures and take legal action through the courts.

For a company debt, the first step in the legal action will be for the ATO to prepare a statutory demand under section 459E of the Corporations Act (also known as a Form 509H). Here’s an example of the first page of a statutory demand.

Sample ATO Statutory Demand

There should also be some attachments to the statutory demand. These should be a list that details the company’s debt and an affidavit from an ATO officer about how they gathered the information about the debt.

How the ATO Serves a Statutory Demand

Once the ATO has prepared the statutory demand, it has to serve it on the company. It does this in one of three ways:

1. leaving it at the company’s registered office;
2. posting it to the company’s registered office; or
3. delivering a copy of it personally to a director who lives in Australia.

This can be a bit of a trap. A company’s registered office is the address that is on the ASIC register. Quite often, I see situations where a company may have moved, and told the ATO about the new address but not updated the ASIC register.

When the ATO sends the statutory demand to the company, it has to send it to the ASIC registered office – this is a specific requirement of the law that governs companies. It doesn’t matter if the ATO has a different address on file for the company.

If you haven’t updated your company’s registered office on the ASIC register, then you may never receive the statutory demand. This can cause problems for the company down the track. 

What to do When you Receive a Statutory Demand

A company has 21 days from the date of service to sort things out. This means that the company should do one of the following within 21 days:

• pay the amount that the ATO is chasing;
• enter into a payment plan with the ATO for the debt; 
• file and serve an application seeking to set aside the statutory demand; or
• try to convince the ATO to withdraw the statutory demand.

If the company doesn’t successfully do one of these things within 21 days, then it is presumed to be insolvent.

Paying the Amount in Full or Arranging a Payment Plan

Usually, if a tax debt has gotten to the point where the ATO has issued a statutory demand, the company does not have the money to pay the debt in full.

This means that a payment plan is often the best bet for dealing with the statutory demand.

When you make a payment plan proposal to the ATO, it may insist on having business viability information provided in order to assess the company’s position. The type of information you should be ready to provide includes:

• recent bank statements
• detailed profit and loss statement for the year to date and the last 2 financial years
• detailed balance sheet for the year to date and the last 2 financial years
• details of any ongoing financial obligations of the company, such as leases or hire purchase agreements
• aged creditors list (i.e. people the company owes money to)
• aged debtors list (i.e. people that owe money to the company)

The ATO will use this information to assess what sort of payments the company can realistically afford and whether the proposed plan is suitable.

The ATO wants to see the debt paid off in the shortest time possible. If it looks like it will take the company several years to pay off the debt, then it will be very hard to negotiate a plan.

The ATO may be willing to grant a longer than usual payment plan if you are able to offer security over an asset. For example, if the company owns the building from which it operates, the ATO may be willing to take a first or second mortgage over it to secure the payment of the debt.

Challenging ATO Tax Debt Collection Through Set Aside Application

One avenue to address ATO tax debt collection involves seeking to invalidate the statutory demand. This approach is typically pursued when there is a substantial legal basis, although it requires careful consideration due to potential court costs. Additionally, if the application is unsuccessful, the applicant may be responsible for covering the ATO’s court-related expenses.

An appropriate reason for pursuing this course of action is the identification of a significant flaw in the demand. Success in this endeavor relies on demonstrating that the flaw is severe enough to lead to ‘substantial injustice’ if not corrected, which is a stringent criterion to satisfy.

Companies often resort to this strategy when there is a genuine dispute over the debt. However, contesting ATO tax debt collection through statutory demands proves challenging due to the unique status of most tax liabilities. Tax law dictates that the issuance of an assessment serves as ‘conclusive evidence’ of debt, posing a significant obstacle to dispute resolution.

Seeking Withdrawal of ATO Tax Debt Collection Statutory Demand

In certain cases, flaws in the statutory demand may necessitate its withdrawal by the ATO. These errors could range from incorrect addresses to inaccuracies in the stated amounts or procedural missteps that render the demand invalid.

What if you can’t deal with the statutory demand in 21 days

Other things to consider

There are a few other things you should consider. For example:

• are the directors exposed to personal liability for tax debts?
• does the company agree that the ATO has correctly calculated the tax debt? If not, should it lodge an objection?
• is there an opportunity to reduce the tax debt, for example through a request for a remission of the general interest charge?

When I help companies that have received a statutory demand, the answer is usually “yes” to at least one of the above questions. This is why expert advice is so important. The issues exposed by a statutory demand are usually quite complicated and you need the right expertise to be able to address them.

Related Articles

• Director penalty notice – personal responsibility for company tax
• [Infographic] 5 ways the ATO collects tax debts from a company
• The ATO sent a garnishee notice to my bank – now what?