Does a personal insolvency agreement cover tax debt?
Short answer
Yes. Tax debts are unsecured debts, so a personal insolvency agreement (PIA, under Part X of the Bankruptcy Act) can include them and bind the ATO to whatever the agreement pays. The catch is the vote. A PIA needs a majority of creditors by number and at least 75% by value, and the ATO is often the largest creditor, so in practice it decides. It votes yes only when the return beats bankruptcy and your lodgements are in order. Compare with bankruptcy.
How a PIA works
You appoint a registered trustee as controlling trustee by signing a section 188 authority. From that moment your property is under their control and unsecured creditors, including the ATO, must stop enforcement. The controlling trustee reports on your affairs and puts your proposal to a meeting of creditors: a lump sum, instalments over a set period, the sale of a particular asset, or a mix. If creditors pass the special resolution, the PIA is signed and every unsecured creditor is bound, whether they voted for it or not.
Unlike a debt agreement there are no caps on debt, assets or income, so a PIA is the usual route for someone with a large tax debt, some equity, or a directorship they want to keep once the agreement is complete.
What the ATO looks for before voting yes
The ATO's published position is that it supports a proposal that has no adverse features and gives it no smaller share of its provable debt, within a reasonable time, than bankruptcy would. In practice it weighs:
- The controlling trustee's report and whether the offer is realistic.
- Your compliance history, including related entities, and any tax offences.
- Whether every return and BAS is lodged, so it knows the real debt.
- Whether you have arranged to pay future tax on time.
- Any transactions a bankruptcy trustee could unwind, such as assets moved to family.
- Whether you have been candid. A PIA gives creditors fewer powers to investigate than bankruptcy, so it is wary of proposals from people who have not been open.
A PIA is a formal way of achieving what a compromise of tax debt rarely does informally: the ATO accepting less than it is owed.
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What a PIA costs you
Signing the section 188 authority is an act of bankruptcy, and if the proposal fails a creditor can use it to petition for your bankruptcy. Your name goes on the National Personal Insolvency Index permanently and on your credit file for at least five years. You cannot manage a company until the PIA's terms are fully met. There are trustee fees, usually paid from the agreement. And a PIA only covers debts you owe personally: a company's tax debt is a liquidation or restructuring question, though a director penalty that has become your own debt can be included.
What to do next
- Get every outstanding return and BAS lodged, because the ATO will not vote on a proposal it cannot measure.
- Ask a registered trustee for a realistic view of what bankruptcy would return to creditors, since your offer has to beat that.
- Check whether a payment plan or interest remission would do the job first, as a PIA is permanent on the public register.
Related questions
Can the ATO refuse a personal insolvency agreement?
Yes. The ATO votes like any other creditor and, because a PIA needs 75% by value, a large ATO debt effectively gives it a veto. It refuses proposals that return less than bankruptcy would, come from people with unlodged returns, or involve transactions it thinks a bankruptcy trustee should investigate.
Is a PIA better than bankruptcy for a tax debt?
It can be, if you have something to protect. A PIA can let you keep a home or business, avoid income contributions, and return to a directorship once complete. Bankruptcy is simpler and does not need creditor approval. Which suits you depends on your assets, your income and what the ATO would accept, so get independent advice.
Thinking about a PIA for an ATO debt?
Find out what the ATO is likely to accept before you commit. Free and confidential.
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