ATO flexes its debt collection muscle

16 October 2008 Topics: Insolvency and restructuring

If a company does not pay an amount claimed in a statutory demand within 21 days, the company is presumed to be insolvent. This presumption can be relied upon to wind the company up.

A statutory demand can be set aside where there is a “genuine dispute” about the debt claimed in the statutory demand or where there is “some other reason why the demand should be set aside”.

In Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41, the High Court held that a taxpayer cannot set aside a statutory demand for a tax debt merely because they have lodged an appeal against the assessment.

Background

The Commissioner of Taxation issued assessments to a taxpayer company and rejected the taxpayer’s objection against the assessment.

The taxpayer then appealed to the Administrative Appeals Tribunal (AAT).

Before the appeal had been determined, the Commissioner tried to recover the amount set out in the assessment by issuing a statutory demand.

The taxpayer sought to have the demand set aside arguing that the AAT appeal showed a genuine dispute about the tax debt and constituted a good “other reason” for setting the demand aside.

The Commissioner accepted that the taxpayer had a reasonable argument to challenge the assessment.

However, he relied upon provisions in the Tax Acts which provide that a notice of assessment is conclusive evidence (except on an appeal against the assessment) that “the amount and all the particulars of the assessment are correct”.

The High Court accepted the Commissioner’s argument and held that the conclusive evidence provision meant that the statutory demand was valid.

Impact of the decision

The High Court’s decision illustrates the substantial powers at the Commissioner’s disposal. Taken to the extreme it means the Commissioner could liquidate a company even though there is a pending appeal in which the taxpayer has good prospects of success.

This means that it is critical that taxpayers and advisers are conversant with the ATO Receivables Policy, particularly those parts which outline when the Commissioner will defer any recovery action (e.g. where 50% of the disputed tax debt is paid).

The decision does offer some glimmers of hope for taxpayers in the same situation as Broadbeach. A failure to comply with a statutory demand simply means that the Commissioner can bring winding up proceedings. In those proceedings, the Court has a broad discretion to refuse a winding up for reasons which could not have been raised to have the demand set aside.

The High Court noted that a taxpayer might be able to argue that the fact that the assessment was subject to an appeal is a matter which is relevant to this broad discretion.

Kirby J also hinted at some possible doubts about the constitutional validity of the conclusive proof provisions in the Tax Acts.

However, any such constitutional challenge might be ambitious because a majority of the High Court has recently stated that the provisions are valid: see Commissioner of Taxation v Futuris Corporation Limited [2008] HCA 32 at [65].

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