What to Expect from the ATO – When Proposing a Personal Insolvency Agreement.
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For individuals carrying significant debt they can no longer manage, a Personal Insolvency Agreement (PIA) under Part X of the Bankruptcy Act 1966 offers a formal alternative to bankruptcy. It allows a debtor to make a binding proposal to creditors, typically offering a return on what is owed in exchange for a release from the remainder of the debt. Whilst avoiding the more severe consequences that formal bankruptcy carries.
When the Australian Taxation Office is a significant creditor, their vote can determine whether the proposal succeeds or fails. The ATO is the largest creditor in a significant number of PIA proposals, and they approach each one commercially and with a clear and consistent set of expectations. Knowing what those are before you submit a proposal is critical.
Why the ATO’s vote matters so much
A PIA requires approval by a majority in number and value of creditors. When the ATO holds a large proportion of the total debt, securing their vote is often the difference between a successful proposal and being forced into bankruptcy.
1. A Better Return Than Bankruptcy
The ATO’s test is simple: does this proposal return more to the Commonwealth than bankruptcy would?
Under Practice Statement PS LA 2011/16, the ATO will generally only vote in favour of a PIA if it delivers a greater proportion of the provable debt within a reasonable timeframe than the estimated return from bankruptcy. The controlling trustee’s report must demonstrate this financial advantage in their report.
This is not a soft or subjective assessment. The ATO will run the numbers, and if the proposal doesn’t stack up on a like-for-like comparison, they will likely vote no.
2. Full and Transparent Disclosure
The ATO expects complete transparency about the debtor’s financial position. Incomplete or selective disclosure is a fast path to rejection.
This means:
- Full asset disclosure — all real estate, vehicles, shares and business interests must be disclosed. The ATO pays particular attention to ‘antecedent transactions’: assets transferred or sold to related parties before the agreement, which may be investigated and unwound.
- Up-to-date tax lodgements — all outstanding BAS, income tax returns and other lodgements must be current before the ATO will agree to vote. They will not consider a proposal while the full extent of the tax debt remains unknown.
The controlling trustee’s report must give creditors a reliable and independently verified picture of the debtor’s financial affairs.
3. A Genuine Commitment to Future Compliance
The ATO doesn’t only look backwards. They also consider whether the debtor is likely to re-engage with the tax system properly going forward.
A proposal is significantly more likely to be accepted where the debtor has a historically good compliance record, or where concrete arrangements are already in place to meet future tax obligations as they fall due. The ATO will want to see evidence of that commitment built into the proposal itself.
4. Fairness and a Cash-Based Settlement
The ATO expects any proposal to be fair and equitable across all classes of creditors. They will reject a PIA that appears to treat different creditors inconsistently, or that discriminates in how dividends are distributed.
Equally important: the ATO strongly prefers cash-based settlements. Proposals that offer non-cash consideration, such as shares, physical property, or other assets are routinely rejected. The administrative cost and complexity of liquidating non-cash assets means they are usually rejected by the ATO as a creditor.
5. Public Interest and Integrity
Where there is evidence of fraudulent behaviour, illegal phoenixing, closing a company to avoid its debts and restarting an identical operation elsewhere. Or deliberate and sustained disregard for tax obligations, the ATO may vote against a PIA on principle. In those circumstances, they will generally prefer bankruptcy, which triggers deeper statutory powers of investigation and asset recovery.
This is not a factor that affects most genuine PIA proposals, but it is worth understanding. The ATO’s concern with integrity extends beyond the immediate numbers.
The bottom line
For a PIA to succeed when the ATO holds significant voting power, the proposal must be a clean, cash-backed offer that yields a superior return compared to the bankruptcy alternative. It must be supported by full financial disclosure, current tax lodgements, and a credible plan for future compliance.
Why This Matters More Than Ever
The ATO has significantly increased its debt collection activity in recent years. With collectible tax debts exceeding $50 billion. The ATO is now a creditor in a growing number of personal insolvency matters and their expectations have not softened.
At the same time, the PIA is seeing renewed interest as an alternative to bankruptcy for individuals carrying significant ATO debt. When structured correctly and presented with the right supporting evidence, a PIA can deliver a genuine path forward. But the margin for error is small, and the quality of the proposal and the trustee behind it matters.
If you or a client are carrying significant ATO debt and considering a PIA, getting specialist advice before preparing any proposal is essential. The structure of the offer, the timing, the documentation and the presentation to creditors all affect the outcome.
Speak with a Rodgers Reidy adviser today
Brodie Hilet and the Rodgers Reidy personal insolvency team work with individuals and their advisers across all personal insolvency options, including PIA proposals, Part IX debt agreements and ATO engagement. All conversations are confidential and obligation-free.
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Related reading: Is the PIA Coming Back into Vogue? | Personal Insolvency Services | Personal Guarantees: What Directors Need to Know | ATO Debt Collection Trends 2024
