Is Your Business at Risk of Receiving a Wind-Up Notice from the ATO?July 19th, 2015
An organisation that doesn’t go through the formal winding-up process might find they are served with a wind-up notice from the ATO, after a period of inactivity is interpreted as a non-payment of taxes or other obligations.
Does this happen often?
At the moment, the submission of wind-up applications is something the ATO is ramping up, with it making far more applications to the courts to issue wind-up notices in 2015 than previously experienced in recent years. It has been reported by Smart Company that 225 wind-up applications had been submitted to the court by July 2014, and since then the number has grown by a further 200 as of May 2015. Industry members also predicted that this number would grow to more than 550 court applications by the end of May.
The reason the ATO submits these applications to court is primarily to ensure that small businesses aren’t able to deliberately avoid their tax obligations.
For business owners who have received notification from the court that the ATO has submitted an involuntary wind-up notice against you, it’s important that you know this is not to say your business must close. Rather, it’s purely a mechanism for the ATO to determine if a business is solvent or not, and that action will be taken in court if necessary.
Around 50% of wind-up applications from the government result in the liquidation of the company, but many small businesses subject to a wind-up application will also choose to voluntarily enter administration. And as 98% of Australian businesses are SMEs, these wind-up applications affect these companies disproportionately to larger companies.
Experts are also advising that company owners, directors and members use these applications to re-assess their business. With the economic climate looking to continue on this current path into the future, those businesses that are currently struggling (and so are more likely to be subject to wind-up applications by the government) are predicted to continue to struggle into the near future. Insolvency businesses have interpreted these wind-up figures as a ‘trigger point’ which will result in an increase in the number of businesses declaring insolvency, but that it will be a case of waiting to see what happens in the next few weeks as the new financial year of 2015/2016 begins.
If your business has received court notification that a Wind-up Application has been submitted against you by the ATO, then it’s advised you consult a business insolvency practitioner or your accountant as soon as possible to determine a course of action. Expert advice is necessary to ensure that you make the right decision not just for your company, but also for you.
Why do businesses ‘wind-up’?
People wind up companies for any number of reasons. The company might cease to be of use, or it might just be time to close it down and move on in life. But what many business owners forget to do or don’t realise they need to do is de-register their company. Only after deregistration does it cease to exist.
It’s important to note, however, that you can only deregister a company if it is solvent. As you go through the winding up process, you – and any other directors of the company – will need to sign a declaration that the company is still solvent at the time. Making a false declaration can result in a stiff financial penalty and prison time, because simply stopping a company’s operations when it is insolvent is not only illegal but is also unethical.
There are two ways to deregister and wind up a solvent company:
The first way is to apply directly to ASIC to voluntarily deregister a company. ASIC, will, however, only process applications that meet all of the following criteria:
- All members of the company agree to deregister.
- The company is not carrying on business.
- The company’s assets are worth, in total, less than $1000.
- The company has no outstanding liabilities that include unpaid employee entitlements such as:
- Annual leave
- Long service leave
- Payment in lieu of notice
- Redundancy pay, and
- The company is not a party to any legal proceedings.
- The company has paid all fees and penalties payable under the Corporations Act 2001.
There is an application fee associated with this application to de-register, and the applicant for de-registration must be the company itself, a director/member of the company, or a liquidator of the company. If the applicant is the company, a director or secretary of the company must sign the form.
If the business has a sole director or member who is deceased, then the executor of their estate can sign the form and assume the powers of the deceased. Alternatively, the executor can appoint another person to assume the role of director.
There is an exception to this rule if the business is run by a sole director or member who – as an individual – is legally bankrupt, as these people are ineligible to apply for deregistration. In such an event, the trustee of the person’s bankruptcy can sign the form or appoint another person as the director of the company, who could then apply for deregistration.
The relevant form and fee information can be found at the ASIC website here.
The second way to deregister a company is through a member’s voluntary winding-up. This procedure is for solvent companies only, and is initiated by the company’s members. It involves:
- The orderly winding-up of the company’s affairs.
- The appointment of a liquidator to manage the process of realising any remaining access.
- Ceasing or selling the operations.
- Payment of any debts.
- The distribution of any assets remaining among its members.
This is a process that larger companies that are looking to cease doing business will follow, as they will not meet the criteria to apply directly to ASIC for deregistration.
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