The four pillars of the ATO’s debt recovery practices
This paper considers the four pillars of the ATO’s debt collection policy for undisputed debt currently in operation. As advisors to businesses affected by the pandemic lockdowns, we are interested to understand the mind of the ATO in making its decisions that affect businesses. The paper concludes with our observations and areas where we provide support.
We have been watching for communication to the business community from the ATO on the timing to restart of its debt recovery processes and last month the ATO made announcements relating to undisputed amounts owing at and above $100,000.
Under laws passed in late 2019, the ATO has the power to report outstanding tax debts to credit reporting bureaus. It hasn’t used this power since debt recovery action was paused during the COVID-19 pandemic. It’s interesting to note then, that last month notifications of intent were sent regarding the recommencement of the reporting of outstanding tax debt (GST, PAYG, SGC, penalties, and interest) totalling $100,000 or more, each of which is more than 90 days overdue.
This move by the ATO will adversely impact the credit rating of companies that are in arrears with undisputed debt. The ATO has indicated that intent is to compel companies to engage with them and deal with outstanding debts in a timely manner. The other goal is the public interest issue; to curtail the advantages that some businesses gain by paying their tax debts on time by using the ATO as a source of overdraft funding.
In a previous paper we outlined the ten ATO tax recovery policies included in its various Practice Statement Law Administration (PS LA) and other resources including a report from the Inspector General of Taxation in June 2021 and an ASBFEO research paper titled A tax system that works for small businesses March 2021. During the pandemic we have sought to regularly refresh our knowledge of the ATO’s collections and recovery policy.
Communication including early debt recovery action
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.
The Inspector General recommended in June that the ATO needs to investigate the reason for the accumulation of undisputed debt in successive years, improve its debt collections performance, and also, improve disclosure and reporting of their recovery practices to small business.
The ATO encourages and invites communication with them as key to tackling debt and have told tax agents that they would like to work with them to prevent and manage clients’ tax debt, regardless of their situation.
“Your client’s behaviour, individual circumstances and lodgement and payment history are used to determine the most appropriate action for a tax debt. We recognise that clients may occasionally experience short term cash flow issues that prevent them paying on time. to assist, we offer payment plans tailored to their individual circumstances.”
The ATO is prepared to grant payment plans
The ATO is willing to grant payment plans and our experience is that businesses should commit to payment plans that are supported by financial projections and avoid breaching a repayment plan that is too ambitious. We recommend involving an accountant in making projections for conducting the repayment plan negotiation.
ATO debt recovery action
Monies owing to the ATO can be significant, and our knowledge of the ATO and its approach to collection is often decisive in bringing about a good or better outcome.
Our observations, our experience
Levi Consulting has in-depth of knowledge to advise on the above issues with experience in more than 100 restructure and turnaround assignments across a broad range of industries.
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. Also, for example, an understanding of the capacity (or lack of capacity) of the ATO to consider settlements or compromises in connection with the principal amount owing, interest owing, and also, penalties.
When formal and informal options with the ATO are either exhausted or will potentially be exhausted, we will consider, alongside clients and their advisors, the advantages and disadvantages of restructure and turnaround including formal procedures under the Corporations Act. In some cases, we would consider these where, for example, creditors, including the ATO, might be persuaded that a deed of company arrangement under the Act would be advantageous for both parties. This is particularly so where a business can continue trading and be more 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 clients to provide a second opinion service, and we can quickly perform invasive and or non-invasive assessment of a client’s financial and business options.