ATO, accountants and directors beware preferential payments

The ATO is quite often subject to unfair preference claims made by Liquidators who are seeking to recover funds for creditors generally.  Traditionally this would involve lawyers and possibly Courts but in recent times the ATO has sought to settle unfair preference claims without the need for a Court order under s588FF of the Corporations Act 2001. This now occurs where the ATO:

  • Is satisfied that an unfair preference or uncommercial transaction has been received;
  • The amount repaid is for full and final satisfaction of the claim; and
  • It does not intend to defend the claim or seek indemnity against the directors of the company under s588FGA of the Act.

The process for settling claims under $25,000 is reasonably simple and expedient and does not require much authority to be settled.  However, claims ranging from $25,000 to $500,000 can only be settled if the ATO receives written advice from an external legal provider evidencing the validity of the claim and stating that the settlement would be in accordance with legal principle and practice.

It should be noted that under s588FGA of the Act, a director(s) may be liable to indemnify the ATO against any loss or damage resulting from an order under s588FF of the Act after repayment of a preference claim has been made. The need for indemnification of the ATO by the directors would also need to be decided by the Court and included in its decision.  It should be noted however that the ATO does not pursue the director(s) for indemnification in every case and the ultimate decision rests with the ATO.

The ATO has now indicated, quite rightly I think, that they are concerned with the growing amount being paid out in preference claims.  Thus they are seeking to ensure that Directors will need to declare that their business is solvent and will remain solvent when making a lump sum payments to the ATO or when entering into a payment plan with the ATO.  This will often require judicious consideration and assessment, thus it will be common for the director to seek the assistance of their accountant or tax agent in doing so.

Accountants, Business Advisors and the like will need to be extremely vigilant when a director approaches them to ask for assistance in determining the solvency of their business as they may well quickly find themselves held liable for any errors that appear later. This is due to the fact that they could inadvertently become the one who is required to make a value judgement in difficult circumstances; if the plan goes well all is OK but if it fails then the adviser may well end up in the firing line.  Extra care and vigilance is required and remember it may be better and safer to get a second opinion from someone with proper insolvency training and expertise.