ARTICLE
6 August 2024

Personal ATO debt: what are the options?

W
Worrells

Contributor

We are registered liquidators and registered bankruptcy trustees, with more registered bankruptcy trustees than any other private practice/brand in Australia. Complementing our insolvency brand are Principals with certified fraud examiner and forensic accountant qualifications.
The Bankruptcy Act provides powerful tools for individuals to restructure their personal financial affairs.
Australia Insolvency/Bankruptcy/Re-Structuring

How do you face tax debt without a corporate safety net?

The increasing adoption of the Small Business Restructuring (SBR) regime since its introduction in January 2021 has been a significant development in the field of corporate insolvency. The SBR regime allows companies with specific debt profiles to submit a restructuring plan to their creditors, aiming to achieve a more manageable financial position while maintaining the directors' control over business operations. This innovative approach provides a lifeline to struggling small businesses, helping them navigate financial difficulties without surrendering operational control.

As readers may be aware, the SBR regime has gained substantial traction over the past few years. According to the latest data, 16.5% of all corporate insolvency appointments for the financial year ended 30 June 2024 were related to the SBR regime, a significant increase from 7.5% in the preceding financial year to 30 June 2023. This surge in adoption underscores the regime's appeal and effectiveness in providing a viable pathway for small businesses to restructure their debts and return to profitability.

Despite the evident success of the SBR regime, it is essential to recognise its limitations. One of the most significant constraints is that it is only available to incorporated entities. This restriction raises an important question: what restructuring options or relief are available to individuals who have not been operating under a corporate structure, or those who have incurred significant personal debt due to personal guarantees or Australian Taxation Office (ATO) director penalties?

While there is no direct equivalent to the SBR regime in the personal insolvency space, several existing options under the Bankruptcy Act can accommodate these scenarios. The term "bankruptcy" often elicits negative connotations, but there are legitimate strategies under the Bankruptcy Act 1966 that can provide relief from personal debts without resulting in a permanent bankruptcy record. These options include Part X Personal Insolvency Agreements, Part IX Debt Agreements, and compositions under Section 73 of the Act.

Part X personal insolvency agreements

Part X of the Bankruptcy Act sets out a process where an individual's assets and financial affairs fall under the control of a Controlling Trustee for approximately 30 business days. During this period, the Controlling Trustee investigates the individual's financial position and provides a report to creditors, including a proposal for a Personal Insolvency Agreement. This report contrasts what creditors might expect to receive in the event of the individual's bankruptcy versus what is being offered under the proposed Personal Insolvency Agreement and calls a meeting of creditors to determine whether the proposal is accepted or rejected. Typically, the proposed agreement seeks a significant compromise on the individual's debts or a more manageable timeframe for repaying the debts.

The Part X process offers a structured approach to personal debt restructuring, allowing individuals to negotiate with their creditors and avoid the stigma and long-term consequences of bankruptcy. By working with a Controlling Trustee, individuals can develop a tailored plan that addresses their unique financial circumstances and provides a viable path to debt resolution.

Part IX debt agreements

Part IX of the Bankruptcy Act offers another avenue for personal debt restructuring. This option is designed for individuals with lower levels of debt and involves specific qualifying criteria, such as thresholds on the amount of debt, the individual's income level, and the value of owned property. Part IX Debt Agreements are more affordable than Part X agreements, with much of the administrative work handled by the Australian Financial Security Authority (AFSA).

Under a Part IX Debt Agreement, individuals work with an administrator to propose a repayment plan to their creditors. This plan usually involves making regular payments over a set period, based on the individual's capacity to pay. The agreement provides a structured and manageable way to repay debts, offering a lifeline to those who might otherwise face overwhelming financial pressure.

Section 73 offers

For individuals who have already declared bankruptcy, there is another often overlooked option: submitting an offer to creditors under Section 73 of Part IV of the Bankruptcy Act. This offer is typically made when the individual believes they can provide a better outcome for creditors than what might be achieved through the continuing bankruptcy process. If creditors accept the offer, the bankruptcy is annulled immediately, and the individual is free to resume their financial affairs under the agreed terms.

Offers under Section 73 provide a valuable opportunity for individuals to resolve their financial difficulties without enduring the long-term consequences of bankruptcy. By negotiating with creditors and offering a more favourable resolution, individuals can regain financial stability and move forward with their lives.

Conclusion

The Bankruptcy Act provides powerful tools for individuals to restructure their personal financial affairs. The fact that an individual cannot pay all their debts when due does not automatically mean they must consider bankruptcy as the only solution. In circumstances where an individual has access to third-party funding assistance or can offer creditors a better outcome than what might be achieved under bankruptcy conditions, they should seek appropriate advice on the various options available to restructure their personal finances.

Just as the SBR regime has proven to be a valuable tool for small businesses, personal insolvency options like Part X Personal Insolvency Agreements, Part IX Debt Agreements, and Section 73 offers provide viable pathways for individuals facing financial challenges. By exploring these options and working with experienced advisors, individuals can find the best solution for their unique circumstances and work towards a more stable financial future.

Footnote
1 ASIC Insolvency Statistics – Series 1 & Series 2, published 8 July 2024.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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