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The ATO is sympathetic to DOCAs when a business has a road map for recovery, says Worrells.
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Compliance track record ‘a trump card when trouble hits’
23 August 2022
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11 minute read
A strong compliance history and clear plan for meeting liabilities will help put the ATO onside if a business hits trouble and needs a deed of company arrangement (DOCA), said insolvency specialist Worrells.
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Recent experience handling companies in debt suggested some strategies were especially effective in persuading the ATO to trade future certainty against maximum payback now, said Worrells western Sydney office manager Youssef Sarakbi.
“Provided there was nothing illegal done in the company prior, the ATO and other creditors are usually happy to support the company moving forward even if it means a small return,” he said.
“The ATO even admitted: ‘It’s not always about how much money we get back out of these DOCAs, we care more about us not being here in six months talking about the same problem.’ ”
He said the ATO would be curious about the source of funds used for the DOCA contribution to ensure that the business was not simply swapping one debt for another and was able to trade profitably.
Mr Sarakbi said compared to liquidation, DOCAs usually offered a better return even at 10¢–20¢ on the dollar. At the same time, most company directors realised they had to make extensive changes and were open to suggestions such as:
- Engaging an external accountant or subscribing to accounting software to give regular financial updates on the company’s financial position, rather than reviewing the figures on a quarterly activity statement prior to lodging with the ATO.
- Opening a bank account specifically for tax and superannuation costs. For example, if a company receives $110,000 from a customer, rather than the company having direct use of all the funds, an amount of $10,000 (say for GST) is put in the new bank account so that money is available once ATO lodgements are due.
- Change ATO reporting intervals from quarterly to monthly. This heightens the company’s awareness of its liabilities and means it pays less but more frequently.
Mr Sarakbi said nine out of 10 troubled companies he had seen were in the construction industry, with debts ranging from $100,000 up to $40 million where a large project had failed.
“What we’ve seen in construction lately is they tend to stop communicating with the ATO, stop watching, stop paying. Then they come back a year or two later and say, ‘I can secure this new contract, but I’ve got this massive debt over my head and I can’t resolve it, can I do a DOCA?” Mr Sarakbi said.
“But you look back at the compliance history and say, well, that’s going to affect you big time.
“Some we’ve spoken with had a problem pre-COVID and they were talking about a possible administration and they’ve come back and said, out debt has now tripled what can we do? They’ve just dug a bigger hole.”
Mr Sarakbi said Worrells was getting more appointments and most were because of the ATO’s crackdown. Creditors now wanted administrators appointed and requests for repayment arrangements were being closely scrutinised.
“They are now asking for things like cash flow forecasts, budget forecasting. So when you come to them with a payment arrangement request, you’ve got to come up with a big plan and actually prove how you’re going to get this money in and pay it back,” Mr Sarakbi said.
“Creditors in general are starting to lean more towards if you want us to compromise our debt, appoint an independent party that can actually look in and give us their opinion as to what’s going wrong and how you can fix this.
“It’s one thing to address older debts, but how are you going to address older debt and your ongoing liabilities every month or three months?”
In particular, the ATO viewed outstanding SGC as employee money and a priority claim that had to be satisfied in full prior to a proposed restructuring.
He said the worse was yet to come with the ATO still ramping up activity and gradually issuing more statements of claim.
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