In this article, we consider the ATO’s collection and recovery policy as it is important to understand the mindset of the ATO in making decisions that may affect businesses, both small and large. In other blogs, we have explored new options for restructuring eligible* companies using Part 5.3B of the Corporations Act 2001, known as the Small Business Restructuring Process or SBR, and have included case studies.

The ATO has reported an increase in debt owed to the ATO, currently amounting to about $50 billion, up from $35 billion pre-Covid.

What have we read?

“Inspector-General Final Report – An Investigation and Exploration of Undisputed Tax Debts in Australia” (June 2021) provides commercial and technical recommendations to the ATO about its recovery policies.
ASBFEO research paper “A tax system that works for small businesses” (March 2021) is informative.
ATO tax recovery policies included in its “Practice Statement Law Administration” (PS LA) releases listed below are valuable:

PS LA 2015/1 Code of Settlement

PS LA 2011/3 Compromise of undisputed tax-related liabilities and amounts payable to the Commissioner

PS LA 2011/4 Collection and recovery of disputed debts

PS LA 2011/6 Risk management in the enforcement of lodgement obligations and debt collection activities

PS LA 2011/7 Settlement of debt litigation proceedings

PS LA 2011/12 Remission of general interest charge

PS LA 2011/14 General debt collection powers and principles

PS LA 2011/16 Insolvency; collection, recovery, enforcement issues for entities under external administration

PS LA 2011/17 Debt relief, waiver and non-pursuit

PS LA 2011/18 Enforcement measures used for the collection and recovery of tax related liabilities

Extract PS LA 2011/16 para 32

“In determining whether to vote for an alternative agreement or arrangement, the Commissioner will have regard to all relevant matters. These may include, but are not limited to:

any legal advice which the ATO may have obtained.
the contents, comprehensiveness and adequacy of relevant reports: that is, regard should be had to the contents, including any relevant omissions, in the statement of affairs or report as to affairs, a proposal, the report prepared by the trustee or administrator.
any liabilities not yet established, such as unissued assessments or outstanding documents.
whether the debtor has made appropriate arrangements to meet future tax liabilities as and when they fall due.
the debtor’s compliance history, and the compliance history of related parties or entities.
the extent and seriousness of any taxation offences which may have been committed.
the likelihood that the proposals put forward would be achieved.
the maintenance of any priority the Commissioner may have had in bankruptcy or liquidation.
any association between the debtor and other creditors (including associations which involve an assignment of debt).
in the case of a debtor who is being less than candid about their financial affairs, the fact that the process may not provide the extensive investigative tools available to a trustee in bankruptcy or liquidator.
other matters that are considered to be of public interest or which reasonably question the fairness and appropriateness of voting in support of proposals, particularly where the consequence of those proposals is the removal of statutory powers of investigation, examination or the ability to clawback assets or funds.
any apparent voidable transactions or dispositions which might be unable to be pursued if the proposal were to be accepted.
the tangible benefit to the Commonwealth revenue that is expected to be gained from any proposed arrangement.
the manner in which the proposal would distribute a dividend between all classes of creditors or whether the proposal is considered to be unfairly prejudicial or discriminatory.”

Our results

We have Chaired interviews with senior ATO personnel at industry conferences from 2021 to 2023.

Post-Covid, there has been substantive and positive change in the ATO’s strategy to encourage businesses to engage with the ATO on tax lodgements and payment of tax debt.

The purpose of the Inspector-General’s 2021 report was to understand trends and the landscape of outstanding tax debts in Australia and to present data and information to kickstart an important conversation about its recovery; to identify and gain greater insight into which segments of the economy are experiencing increases in collectable debt, and to make recommendations.

Debt to the ATO at 30 June 2020 was $34.18 billion, including small business debt of $21.4 billion or about 60% of the total collectable debt owed to ATO. The total collectable debt to ATO has increased substantially, currently amounting to about $50 billion.

The industries with the largest amount of debt owing (by percentage) are:

Construction
Professional, scientific and technical services
Accommodation and food services
Administrative and support services
Financial and insurance services
Manufacturing

This is followed by many other industries:

Rental, hiring and real estate services
Retail trade
Transport, postal and warehousing
Other services
Health care and social assistance
Wholesale trade
Agriculture, forestry and fishing
Arts and recreation services
Mining
Education and training
Information media and telecommunications
Public administration and safety
Electricity, gas, water and waste services

Our observations

The ATO has investigated the reasons for the accumulation of undisputed debt, improved its debt collection performance, and developed strategies to engage with businesses. Additionally, it has improved disclosure and reporting of its recovery practices to small businesses.

The explanation for the increase in the amount owed to $50 billion is not available to us, other than attributing it to the public policy of restraint in recovery action during Covid. The amount owed to ATO has not yet returned to pre-Covid levels.

We are confident that the current strategies and policies of ATO to encourage communication by businesses with ATO, and then, if necessary, Firmer Action by the ATO will reduce the amount owed to ATO. This encouragement (or enforcement) may lead companies to repay debt in full, enter into repayment arrangements with the ATO, or restructure using informal procedures or formal procedures including liquidation, voluntary administration (Part 5.3A of the Corporations Act 2001) or small business restructuring (Part 5.3B of the Corporations Act 2001).

The ATO is commended for participating in restructuring of eligible* small businesses with tax debt using the procedure outlined in Part 5.3B of the Corporations Act 2001. It has shown to be effective and has a high rate of success for eligible* small businesses to extinguish ATO debt and provide a better recovery to the ATO and other creditors within a reasonable period than would be received under bankruptcy or liquidation.

The ATO is adopting a range of targeted strategies in response to the growth in the amount owing to ATO by businesses, particularly where there is no communication with ATO. These strategies include:

Director penalty notices
Personal liability
Garnishee of bank accounts and debtors
Legal actions including summons, creditors petition, wind-up
Notification of business tax debt to collection agencies

Part 5.3B of the Corporations Act 2001 is suitable for eligible* businesses in construction, accommodation and food services (cafes, restaurants, take-away food services), and other services (personal services, repairs, maintenance).

Statistics

The ATO indicates that until end of October 2023, it was a creditor in 98% of 511 companies proposing a SBR under Part 5.3B of the Corporations Act 2001, and the majority creditor in 90% of those companies. 92% of the proposals were successful.

Observations

The ATO will generally support proposed arrangements or agreements under Part 5.3B of the Corporations Act 2001 that have no adverse features and can provide the ATO with a better recovery within a reasonable period than would be received under bankruptcy or liquidation.

In line with community expectations, the ATO will not support proposals by those that seek to take advantage or refuse to meet their obligations or seek an unfair financial advantage (refer to PS LA 2011/16 para 32).

Our experience

We have completed hundreds of formal and informal restructuring and turnaround assignments across various industries.

Studying the current ATO recovery and collections policies has been invaluable in our capacity as experienced practitioners to better understand the ATO’s current thinking. For example, we have gained insights into the ATO’s recovery policies concerning repayment arrangements, director penalty notices, statutory garnishee notices, winding-up notices, and ATO remedies that result in directors becoming personally liable for company debt. This includes understanding of the ATO’s capacity (or lack thereof) to consider settlements or compromises regarding the principal amount owing, interest owing, and penalties. Additionally, we have explored the opportunities available post-Covid through Part 5.3B of the Corporations Act 2001 for restructuring.

About us

We are often retained directly by directors, or through their accountant, lawyer or partner to consider formal and informal restructuring options for businesses of various sizes: XS, S, M, L, XL, XXL and XXXL.

We are able to quickly perform a 60-minute invasive or non-invasive assessment of a client’s financial and business options.

Monies owing to the ATO (and other creditors) are often significant for small businesses, and our knowledge of the options and ATO approach to collection is often decisive in bringing about a successful outcome.

David Levi is a registered liquidator, registered with the Australian Securities and Investments Commission. As a registered liquidator, he may act as a Small Business Restructuring Practitioner. David also accepts appointments to informal and formal restructuring and insolvency appointments for businesses, partnerships, shareholder disputes, property disputes including s 66G of the Conveyancing Act 1919, and mortgagee and loan recoveries for lenders.

Contact David Levi on 0418 602 466 for a free chat or Zoom session.

Click here to download our fact sheet for businesses and their advisors

* Definition of eligible under s 453 of the Corporations Act 2001 (Cth).

ATO Collection and Recovery Policy: Options for Businesses