In this article, we consider the ATO’s collection and recovery policy as it is important to understand the mind of the ATO in making decisions that may affect businesses, both small and large.
Levi Consulting can help businesses with tax-debt.
ATO debt recovery: the options for business
A question we’re interested in is: how do we make small businesses financially sustainable after COVID where there is an accumulation of undisputed debt, particularly to Australian Taxation Office (ATO) and others?
Like all Australians, we want businesses to be financially sustainable, to survive and grow, despite the uncontrollable impacts, including lockdowns, related to COVID.
Successful businesses surround themselves with advisers, mentors, and have a one-page plan supported by forecasts and projections.
However, uncontrollable and unexpected events such as COVID-19 occur that may result in unpaid tax debt or other debt.
Over the last few years, ATO has reported an increasing trend in the levels of undisputed collectable debt, that is, debt which is not subject to objection or appeal.
We examined the ATO’s collections and recovery policy with a read of the 191-page report by the Inspector-General of Taxation “Inspector-General Final Report – An Investigation and Exploration of Undisputed Tax Debts in Australia” dated June 2021. The report gives commercial and technical recommendations to the ATO about its recovery policies.
We read several ASBFEO research papers on the ATO and small business, including the latest one – A tax system that works for small businesses (March 2021); and finally, we read ATO tax recovery policies included in its Practice Statement Law Administration (PS LA) releases listed below:
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 lodgment 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
We found the research interesting.
Over the last few years, ATO has reported an increasing trend in the levels of undisputed collectable debt.
The purpose of the Inspector-General’s 2021 report was to understand this trend 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.
It found total collectable debt to ATO at 30 June 2020 was $34.18 billion (an increase in 2019 from $26.5 billion, and 2018 from $23.73 billion).
Of that amount of $38.18 billion, “small business debt” at 30 June 2020 was $21.4 billion (2019 $16.47 billion; 2018 $15.05 billion) or about 60% of the total collectable debts owed to ATO. The total amount has increased substantially.
The industries with the largest amount of debt owing (by percentage) were:
- Professional, scientific and technical services
- Accommodation and food services
- Administrative and support services
- Financial and insurance services
This was 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
- Education and training
- Information media and telecommunications
- Public administration and safety
- Electricity, gas, water and waste services
Payment arrangements with the ATO are an indication of continued engagement by taxpayers to pay off their debts. However, across all taxpayer segments, payment arrangements have been in decline, even though automated systems exist to make it easier to enter payment arrangements.
The Inspector-General recommended that the ATO needs to investigate the reason for the accumulation of undisputed debt, improve its debt collections performance, and to improve disclosure and reporting of their recovery practices to small business.
We have completed more than 100 restructure and turnaround assignments in most of the industries listed.
The current ATO recovery and collections policies were valuable to study in our capacity as experienced practitioners to better understand the ATO’s current thinking, for example, the ATOs recovery policies around repayment arrangements, director penalty notices, statutory garnishee notices, winding-up notices, and ATO remedies which result in directors becoming personally liable for company debt. This includes, for instance, an understanding of the capacity (or lack of capacity) of ATO to consider settlements and or compromises in connection with the principal amount owing, interest owing, and penalties.
When formal and informal options with ATO are either exhausted or will potentially be exhausted, we will consider with clients, and their advisors, the advantages and disadvantages of restructure and turnaround including formal procedures under the Corporations Act. For instance, we would consider these where creditors, including the ATO, might be persuaded that a deed of company arrangement under the Act would be to their best advantage and also for a business to continue trading, and to be or become financially sustainable despite a financial set-back. There are also new small business restructuring processes available which we would consider.
We are often also retained by a client to provide a second opinion service, where we’re able to quickly perform invasive and or non-invasive assessment of a client’s financial and business options.
Moneys owing to the ATO are often significant, and our knowledge of the ATO and its approach to collection is often decisive in bringing about an improved outcome for our clients.