Review into the Tax Office’s Small Business Debt Collection Practices - Report 12 April 2005

Appendix 1: Terms of reference

A1.1 On 21 April 2004, the Inspector-General announced the terms of reference for his review into the Tax Office’s small business debt collection policies and practices. These were:

This review will investigate the fairness of the ATO’s small business debt collection policies and practices. It will examine some of the perceptions and concerns raised by stakeholders in the course of the scoping review and prioritisation project. It will evaluate whether the ATO’s small business debt collection policies and practices strike an appropriate balance between the competing underlying tensions of efficiently collecting tax debts and recognising the benefits of viable businesses’ ongoing trading.

It will focus upon the following matters:

to identify and determine whether the ATO small business debt collection policies adequately take into account the provision of assistance to small businesses who wish to meet their tax obligations without harming their underlying viability;
to consider the manner in which the ATO implements its small business debt collection policies;
to examine the impact of the ATO’s small business debt collection policies and practices on aspects of small business tax debt collections, particularly:
- the impact of the ATO’s current approach to payment arrangements in assisting small businesses get out of debt without unduly affecting the viability of the business;
- the ATO’s management of debt collection cases, including their timeliness, co-ordination and commercial approach, with regard to the Taxpayers’ Charter and the Compliance Model;
- whether the Commissioner’s policies and practices unnecessarily force small businesses into either bankruptcy or liquidation;
- the consistency of the Commissioner’s exercise of a release from tax debts based on serious financial hardship (Division 340 of Schedule 1 to the Taxation Administration Act 1953, previously section 265 of the Income Tax Assessment Act 1936) with the legislation’s underlying policy; and
- the ATO’s approach to the compromise of tax debts.

Appendix 2: Conduct of review

A2.1 On 7 December 2003, the Inspector-General of Taxation released five issues papers that outlined about 60 systemic tax administration issues of concern which were raised by taxpayers and their representatives during the course of his scoping review. Paragraphs 68 to 74 of Issues Paper 4 outlined the issues of concern about the Tax Office policies and practices for collecting debt from small businesses:

68 ATO debt collection practices are of critical concern to small businesses. Around 2.5 million micro-businesses in Australia with an annual turnover of less than $2 million each account for around 10 per cent of Commonwealth revenue but 60 per cent of the overdue debt collected by the ATO.⁷

69 The Auditor-General has reviewed the ATO’s debt collection administration in the past, most recently in 1999, finding that the ATO had been successful in reducing debt ‘written off’ and also increasing the value of debt finalised, notwithstanding that, as the Australian National Audit Office (ANAO) noted:

… the ATO considers broader social issues and believes that a $ expended to $ collected equation, which applies in a commercial environment, should not be the sole consideration for the ATO.⁸

70 There is a perception amongst some small business taxpayers and tax practitioners that the ATO’s policy is that, if a business taxpayer cannot demonstrate an ability to pay tax debts within a year, then the ATO ‘winds the business up’ (that is, initiates bankruptcy proceedings).

71 The ATO has advised that this is not the case. At 3 October 2003 the ATO had in place 84,187 tax debt repayment arrangements to the value of $1.109 billion, including 14,538 repayment arrangements to the value of $323 million that relate to tax debts over 12 months old, and these figures include small businesses.⁹

72 There are related concerns that the ATO ignores the hardship provisions in section 265 of the ITAA 1936 for small businesses in debt, as well as declining to use the discretionary provisions for the remission of the GIC in section 8AAG of the TAA 1953.

73 If the ATO is too aggressive in collecting debt from small businesses, there is a possibility that other creditors of small businesses, as well as employees and the community, may suffer. Small business taxpayers struggling to pay tax debts may, in some cases, be competing in the market against businesses that evade all their tax obligations.

74 A review into this matter could examine the fairness of the ATO’s small business debt collection program, with a particular focus on the processes and practices of ‘winding up’ small businesses. The review will examine if the ATO’s repayment arrangements assist small businesses to get out of debt.

A2.2 Following a meeting in January 2004 with representatives from industry, business and tax practitioner organisations, the Inspector-General placed the issue of the Tax Office small business debt collection policies and practices on his forward work program.

A2.3 The Inspector-General announced the review into the Tax Office’s small business debt collection policies and practices on its website, www.igt.gov.au, from 21 April 2004. The Australian Financial Review reported the commencement of the review on 22 April 2004. The Inspector-General invited 118 organisations and people to make submissions.

A2.4 From May to August 2004, the Inspector-General received submissions from:

• government bodies;

• organisations representing small businesses, accountants, tax practitioners, insolvency practitioners and lawyers; and,

• small businesses, accountants, tax practitioners, insolvency practitioners, lawyers and commercial debt recovery agents.

A2.5 Inspector-General staff visited the Tax Office’s national, Sydney, Parramatta, Penrith, Hurstville, Terrica Place (Brisbane), Market Street (Brisbane) and Moonee Ponds offices to interview Tax Office staff and access documents. Staff also visited eight private sector offices, conducted focus groups with tax practitioners in Melbourne and Perth and visited the offices of the Australian Securities and Investments Commission, the Official Trustee of Bankruptcy and the Commonwealth Ombudsman.

Appendix 3: Letter from the Commissioner of Taxation

Letter from the Commissioner of Taxation Part 1

Letter from the Commissioner of Taxation Part 2

⁷ Australian Taxation Office, Compliance Program 2003—04, Canberra, August 2003, p. 12.

⁸ Australian National Audit Office, The Management of Debt Collection: Australian Taxation Office, Audit Report No. 23 of 1999—2000, Canberra, 2000, summary.

⁹ Commissioner of Taxation, letter to the Inspector-General, dated 14 October 2003.

¹⁰ Available at http://www.ato.gov.au/print.asp?doc=/content/37886.htm viewed on 24 August 2004.

¹¹ Available at http://www.sensis.com.au/media/pdf/sensis_bizindex_feb2004.pdf viewed on 4 May 2004.

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Review into the Tax Office’s Small Business Debt Collection Practices - Report 12 April 2005

Appendix 1: Terms of reference

Appendix 2: Conduct of review

Other relevant documents and developments

Appendix 3: Letter from the Commissioner of Taxation