Liquidating a company with ATO debt: what it costs and what follows you

Why do people think liquidation makes tax debt disappear?

Because for the company, in a sense, it does: the company is wound up and eventually deregistered, and its unpaid debts go with it. That’s why “liquidate and start again” can sound like a clean solution when the ATO letters pile up. The reality for directors is more complicated, and it’s worth understanding before anyone talks you into it.

What does a liquidator do?

An independent, ASIC-registered liquidator:

1. takes control of the company and its assets — directors’ powers end;
2. sells the assets and collects money owed to the company;
3. investigates the company’s affairs and the directors’ conduct, and must report suspected offences to ASIC;
4. recovers certain transactions made before the liquidation, such as unfair preferences;
5. pays creditors in the order the law sets — after the liquidator’s own fees and costs.

Liquidation can be started by the directors and shareholders (a creditors’ voluntary liquidation), or by a court order — for example, after the ATO applies to wind up the company.

What does it cost, and what do creditors receive?

ASIC’s 2024 review of smaller liquidations found:

	Standard CVLs (liabilities of $1m or less)	Simplified liquidations
Average liquidator remuneration	About $18,000	About $19,600
Remuneration as a share of payments out	About 63%	About 58%
Proportion paying unsecured creditors a dividend	4%	11%

In plain terms: in most smaller liquidations, the bulk of the money goes on the liquidator’s fees, and unsecured creditors — usually including the ATO — receive little or nothing.

What follows the director?

Exposure	Survives liquidation?
Lockdown director penalties (GST or PAYG withholding reported more than 3 months late)	Yes
Standard director penalties not remitted within 21 days	Yes
Personal guarantees to lenders, landlords, suppliers	Yes
Unfair preference claims against creditors you paid (which may include related parties)	Can be pursued by the liquidator
Insolvent trading claims	Can be pursued in some circumstances
Disqualification	ASIC may disqualify directors involved in two or more failed companies in certain circumstances

A director with significant lockdown amounts can liquidate the company, lose the business, see its assets consumed largely by fees, and still be personally liable to the ATO. That’s the scenario we see most often when people come to us after the fact.

What about “starting again” with a new company?

Starting a new business after liquidation isn’t illegal in itself. What is illegal is phoenix activity — moving the old company’s assets or business to a new entity without paying full market value, leaving creditors and employees out of pocket. ASIC says legitimate restructures have assets independently valued, with the new company paying that value. Penalties for illegal phoenixing include large fines and up to 15 years’ imprisonment for directors, and the same can apply to advisers who encourage it. See illegal phoenix activity.

When is liquidation the right answer?

Sometimes it is. If the business can’t trade profitably, debts far exceed assets, and there’s no realistic turnaround, a properly run liquidation by a registered liquidator is an orderly, lawful way to close. It can also stop debts growing. If that’s your situation, check registration on the ASIC professional registers, get fee estimates in writing, and use the free Small Business Debt Helpline (1800 413 828) to prepare.

When should you look at funding first?

• The business is viable and its problem is the ATO debt, not the business model.
• Some debt is locked down — only payment removes that personal liability.
• You’ve given personal guarantees you’d rather not see called on.
• You want to keep the business you’ve built.

Paying the ATO in full with a property-secured or unsecured loan keeps you in control, avoids practitioner fees, and removes every director penalty on the amounts paid. Compare honestly using restructure or refinance.

What does a liquidation actually feel like for the owner?

People often underestimate the practical side. Once a liquidator is appointed:

• Bank accounts are frozen or taken over and new money goes to the liquidator.
• Staff may be terminated, and unpaid entitlements become claims in the liquidation, with a government scheme available for some employee entitlements.
• Customers and suppliers are notified. Contracts may end.
• Vehicles, equipment and stock are collected and sold — often at auction prices.
• You’ll be asked for records and a report on the company’s affairs, and may be interviewed.
• Questions may follow for months — about payments you made, assets you hold and how the debt arose.

None of this is unusual or sinister; it’s how a liquidation works. But it’s very different from the “quick fix” some marketing implies, and it’s worth picturing before you decide.

How do personal guarantees play out?

Most small business owners have signed personal guarantees — to the bank, the landlord, equipment financiers and major suppliers. When a company is liquidated, those creditors usually turn to the guarantors for what the company didn’t pay. Combined with any lockdown director penalties, a director can end up with a larger personal problem after liquidation than before. List your guarantees before you speak to anyone; it’s one of the clearest ways to see whether paying the ATO and keeping the company alive is the better path.

Before you sign a liquidator’s consent

If you’re considering liquidation, it costs nothing to check whether funding could clear the ATO and keep the doors open. Talk to us first — there’s no credit check to enquire, your details stay with one team rather than being forwarded to lenders, and a real person will tell you honestly whether liquidation is in fact the better path. Please give accurate figures, including lockdown amounts and guarantees.