Statutory demands issued by the ATO

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Introduction

If your company has a tax debt, the Australian Taxation Office (‘ATO’) may issue the company with a creditor’s statutory demand for payment of the tax debt.

If the company does not comply with the creditor’s statutory demand within 21 days, the company is presumed to be insolvent and the ATO will have a right to apply to appoint a liquidator to wind up the company.

What is a creditor's statutory demand?

A creditor's statutory demand is a formal document served on a company by a creditor when the company owes a debt to that creditor. A debt can include a tax debt which arose under the Income Tax Assessment Act 1936, the Income Tax Assessment Act 1997 or an administrative penalty which arose under the Taxation Administration Act 1953. Form 509H is used with an affidavit which accompanies the statutory demand. The creditor's statutory demand may be served by post or by a process server.

Options for the company when a creditor's statutory demand is served on the company

There are a number of options which you can consider if a creditor's statutory demand is served on your company including the following 5 actions:

  1. enter into a payment arrangement with the ATO for the tax debt;

  2. lodge an objection to the tax assessments, any administrative penalties and general interest charge;

  3. seek the remission of administrative penalties and interest;

  4. apply to the Supreme Court or Federal Court to set aside the creditor’s statutory demand; and

  5. appoint an administrator to the company.

Court application to set aside a creditor’s statutory demand

A company can make a Court application to set aside a creditor’s statutory demand.

The decision in DCT v Broadbeach Properties Pty Ltd [2008] HCA 41 has significantly limited the legal possibilities of a court setting aside a creditor’s statutory demand in essence because a tax assessment is a debt due and payable and the ATO are entitled to collect tax debts even if the tax debt is disputed by the company and you have lodged an objection to the assessment or an appeal against an objection decision.

Time limits are imposed on when a company can apply to a Court to set aside a creditor's statutory demand. Its best to obtain advice from a lawyer about when a company must file and serve any application to set aside the creditor's statutory demand.

A company can in limited circumstances be represented in Court by a director of the company, but otherwise the company must be represented by a lawyer.

Consequences for the company if a liquidator is appointed

If a liquidator is appointed to the company, the liquidator could decide not to pursue the correctness of the amounts of the tax debts of the company but not lodging an objection with the ATO or withdrawing any appeals which have been commenced in the Administrative Appeals Tribunal or the Federal Court. The liquidator will also consider what legal action should be taken against the directors of the company after the liquidators have reviewed the company's books and records. The directors may be sued because the company traded whilst it was insolvent.

Consequences for the directors

There may be serious consequences for the directors of the company if the company does not comply with the creditor's statutory demand because:

  1. if the company was insolvent, the directors may be liable to creditors because the directors were trading whilst the company was insolvent; and

  2. if the company has not paid PAYG and superannuation amounts, the directors will be liable for the unpaid amounts and the ATO will issue director penalty notices to each of the directors.

A director includes a “shadow” director and a “de facto” director. For more information about director penalty notices and who are shadow and de facto directors, see our publication titled “Director Penalty Notices”.

A director who is unable to pay the PAYG and superannuation liabilities may ultimately be bankrupted because the ATO will be able to obtain judgment for the full amount of the liabilities.

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