Payroll tax liquidations: Is it a good idea?

You Legal


You Legal logo
You Legal has always been focused on making the provision of legal services about YOU! You Legal humanises the experience of engaging lawyers and gives you the confidence to lead, the courage to act, and freedom to make your impact in the world. We provide our services Australia-wide. Our team are experts in commercial law, it is our main focus with protecting the purpose of our clients being front and centre of why we do what we do, as a health law firm.
Some of the risks and consequences associated with placing your medical practice into liquidation.
Australia Insolvency/Bankruptcy/Re-Structuring
To print this article, all you need is to be registered or login on

Putting your practice into liquidation if you receive an unexpected tax bill is not a decision to be taken lightly.

Running a medical practice in Australia can be a rewarding experience, both personally and financially, if you get the balance right. As with any business, there are financial risks and challenges that must be managed. One of those that has come into focus since the Thomas and Naaz decision is the risk in the medical industry to receive an unexpected tax bill, in particular for payroll tax.

There have been industry commentators who have suggested that, as the services company running the medical practice operations is a separate legal entity from the doctor and the individuals involved, that medical practice owners should simply put the operating entity into liquidation and start again as a way to avoid paying the tax.

In this article, I explain some of the risks and consequences associated with placing your company into liquidation.


A company is considered insolvent if it cannot pay its debts if and when they fall due and payable. If you are a director of a company, you have an obligation to ensure that the company you are the director of does not trade while it is insolvent. This duty is enshrined in the Corporations Act, and a breach of this duty can lead to civil penalties and, in some circumstances, criminal charges.

Receiving an unexpected payroll tax bill may have you worrying that you are breaching your duty to avoid insolvent trading if you cannot see an immediate way to pay the tax. This article hopes to shine a light on the options available to you.


Firstly, it's important to understand what liquidation or 'winding up' is. There are two types of winding up, voluntary and compulsory.

Voluntary winding up occurs when the company's directors make a decision to close the business. It may be that they have established that the company is not able to pay its debts as and when they fall due and payable and have been advised that the best option for the company is to appoint a liquidator and place it into liquidation.

Compulsory winding up, on the other hand, occurs when a court orders the company to be liquidated, usually because it is insolvent, and a particular creditor has sought that an order be made by the court to appoint a liquidator to wind the company up.

When a company is placed into liquidation, a liquidator is put in control of the entity and then will sell the company's assets to pay its debts. In the case of medical practice, this would mean that all equipment, furniture, and other assets would be sold to pay any outstanding debts, employee entitlements, including any unexpected tax bill and, of course, the liquidator themselves. The remainder of any funds (if any) would then go back to the shareholders. Liquidation brings the company, as a separate legal entity, to an end, and the liquidator's final act is to officially dissolve the company.

Consequences for Directors


If you are thinking of placing your medical practice's services company into liquidation to avoid an unexpected payroll tax invoice, you should know that when it comes to tax obligations, many of the state revenue offices (specifically NSW, QLD, VIC and SA) have the power to garnish bank accounts of directors in the form of a 'Compliance Notice'. This process is similar to the garnishing of bank accounts by the Australian Taxation Office (ATO).

When a state revenue office garnishes a bank account, it means that they have obtained a court order allowing them to freeze funds in the account up to the amount owed. The bank is then required to withhold the funds and transfer them to the state revenue office to pay off the debt.

It's important to note that garnishing a bank account is a serious step and is usually used as a last resort when other attempts to recover the debt have failed. If you owe money to a state revenue office, it's always best to communicate with them and try to work out a payment plan or come to an agreement on how to pay off the debt.

If the company owes money to the ATO, you should be aware that liquidation does not absolve the company or its directors of any debts owed to the ATO. In fact, the ATO is often one of the first creditors to be paid during liquidation proceedings. This means that putting a medical practice into liquidation is unlikely to result in any significant reduction in any amount owed to the ATO.

In addition to the regulators chasing directors personally for outstanding tax, the personal finances of the directors may be impacted if they have given personal guarantees for any debts owed by the practice. Personal guarantees are often given to landlords when entering into leases or banks when entering into banking facilities.

This could result in the directors being personally liable for any outstanding debts, even after the practice has been liquidated. Disputes regarding personal guarantees can take many years to resolve.

There can also be implications for your credit score if you are in a company that goes into liquidation, which can have long-term consequences, including having to explain what happened to financial institutions in the years to come.


Placing a medical practice into liquidation can have serious consequences for the doctors (or non-doctors) who own the practice, the practice's reputation and the personal finances of its directors.

It can also tarnish your professional reputation amongst other medical practitioners. Like any profession, the opinions of our peers matter to most of us personally.

Liquidation can damage the reputation of the practice. If you do decide to set up again, it can potentially be difficult to attract new patients.


'Phoenixing' is the process whereby directors transfer assets out of one company into another (often related) entity. If you think that you can transfer your medical practice's assets into a new legal entity and then put your medical practice into liquidation, think again.

Director identification numbers were introduced to try and prevent this conduct from occurring. You can read more about Director Identification Numbers and why they were introduced here: The End of Phoenix Directors: Ashes to Ashes, Dust to Dust.


If you are deeply concerned about the solvency of your medical practice due to the tax bill you have received, you need to understand the Safe Harbour Defence. In September 2017, the Australian government introduced safe harbour legislation. If the requirements of the legislation are met, the Safe Harbour operates as a defence to insolvent trading.

To rely on the safe harbour defence, directors must develop and pursue one or more courses of action which are reasonably likely to lead to a better outcome than the immediate appointment of an administrator or liquidator.


1). Strategy. The directors must prepare a strategy. The strategy must be well-considered and thought out. It must be proactive and well-documented. Directors should seek advice from qualified professionals. Hope is not a strategy.

2). Reasonably likely. The strategy must be reasonably likely of achieving better results. Reasonably likely is defined as fair, sufficient or worth noting. It cannot be fanciful or remote.

3). Better outcome. Directors will need to compare two outcomes - the outcome of putting the company into immediate administration or liquidation, compared with the outcome of the strategy or course of action they have prepared.

Importantly, the course of action or strategy does not have to be successful. The definition of a better outcome has been given a broad scope in the legislation, but it is important to note this new legislation has not yet been tested in the courts. You must seek professional advice and keep thorough records and evidence that your strategy has led, or was reasonably likely to lead, to a better outcome than the appointment of an administrator.

Safe harbour from personal liability for insolvent trading begins when you start developing your strategy. It ends when you cease to pursue your strategy or events, or new information indicates that it is no longer likely to lead to a better outcome than administration.


  • there is dishonesty, gross negligence, fraud or criminal activity;
  • directors failed to comply with their ongoing tax reporting obligations;
  • directors failed to meet their employer obligations, including superannuation;
  • if/when a liquidator is appointed, you fail to fully cooperate with the former liquidation.

The safe harbour defence allows directors to manage risk instead of avoiding personal risk at the expense of innovation and company potential. Managing risk does not mean ignoring it or hoping it will go away.

Leverage an Expert

In summary, putting a medical practice into liquidation to avoid paying an unexpected tax bill is not a sensible course of action. Liquidation can have serious consequences for the practice's reputation and the personal finances of its directors. Instead, medical practitioners should seek assistance if needed, as well as ensure that appropriate financial management systems are in place. By taking these steps, medical practitioners can better manage unexpected tax bills and ensure the ongoing success of their practice.

Some years ago, I wrote How to Avoid a Fall from Grace: Legal Lessons for Directors. This book is a guide for directors of companies that explains the duties of directors and the legal landscape in that companies operate in. It is just as relevant now as it was when I first wrote it, and I encourage you to arm yourself with the knowledge it contains.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More