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Insolvency (Part 1): What Every Adviser Must Know About Solvency, Risk and the ATO Crackdown
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Key Insights
Financial statements do not always show the real solvency position. A company may appear solvent on paper, but the position can be more complicated if assets are tied up in shareholder transactions, related party dealings or amounts that may not be readily recoverable. Advisers need to look beyond the balance sheet when assessing solvency risk.
Division 7A issues can compound financial distress. Informal loan arrangements, unpaid present entitlements and related party transactions can create tax consequences under Division 7A. If these issues are not managed properly, deemed dividends and compliance failures can increase pressure on the company and its directors at the same time solvency concerns are emerging.
Delayed action can turn tax and structuring issues into enforcement risk. Poor structuring or failure to address issues early can escalate into statutory demands, Director Penalty Notices and personal exposure for directors. With ATO scrutiny increasing, advisers and directors should identify related party, Division 7A and solvency issues before the matter becomes an enforcement problem.
Solvency is not always as simple as looking at the balance sheet.
In Part 1 of this three-part Explain That series on insolvency, Andrew Henshaw is joined by Demian Walton to discuss how solvency should be understood in practice, and why businesses, directors and advisers need to look carefully at what sits behind the financial statements.
The episode explores how company accounts can misrepresent solvency, particularly where assets are tied up in shareholder transactions, related party transactions, informal loan arrangements or unpaid present entitlements. These issues can also intersect with Division 7A, creating tax consequences that may increase pressure on both companies and directors.
The discussion covers:
- what insolvency means in practice;
- why financial statements may not tell the full solvency story;
- how shareholder transactions and related party transactions can affect the analysis;
- the interaction between insolvency risk and Division 7A;
- informal loan agreements and unpaid present entitlements;
- how deemed dividends can create significant tax consequences;
- the ATO’s increased scrutiny, audits and compliance activity;
- the importance of benchmark interest rates and integrity measures;
- potential relief under section 109RB;
- how delayed action or poor structuring can lead to statutory demands;
- Director Penalty Notices and personal exposure for directors; and
- why advisers need to understand the overlap between insolvency law and tax risk.
A practical discussion for advisers, accountants, directors and business owners navigating corporate distress, ATO pressure, related party transactions or high-debt business structures in the post-COVID business landscape.
For advice on insolvency, director exposure, ATO audits, Division 7A issues or restructuring risk, contact Velocity Legal’s Insolvency and Tax teams.
This podcast in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this podcast.
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