Overview of stakeholder concerns

1.1 During public consultation for the Inspector–General of Taxation's (IGT) 2013–14 work program, stakeholders raised concerns with the Australian Taxation Office's (ATO) approach to debt collection including delayed recovery action, disproportionate action when debts were pursued and the use of external debt collectors. The IGT commenced this review in response to these concerns.1

1.2 The IGT called for and received a number of submissions and also met with taxpayers, tax practitioners, insolvency practitioners and their representative bodies as well as External Debt Collection Agencies (EDCA) to gain a better understanding of the issues and identify areas requiring improvements.

A range of concerns were raised by stakeholders which may be grouped into the following themes, the ATO's:

  • debt strategies to address the growth in tax debt, including whether the ATO could better prevent debts from arising, improve targeting of debt activities and commence such activities earlier and proportionate to taxpayers' circumstances;
  • debt assistance activities, including how the ATO determines eligibility for payment arrangements, remission of interest and penalties as well as its debt release for serious financial hardship;
  • debt recovery activities, including how the ATO administers activities, such as garnishee notices, Director Penalty Notices (DPN), Departure Prohibition Orders (DPO), freezing orders (Mareva injunctions), securities, tax credit offsets and insolvency actions as well as the recovery of disputed debts and the accuracy of information on which the ATO relies; and
  • use of EDCAs.

1.3 The above concerns are discussed in more detail in the subsequent chapters. ATO debt management strategies are explored in Chapter 2 whilst ATO debt payment assistance, ATO firmer debt recovery activities and ATO use of EDCAs are examined in Chapters 3, 4 and 5 respectively.

1.4 Before addressing stakeholders' concerns, it is beneficial to first understand a range of factors including business cash flow management, credit risks, how debts arise in the tax system and how the ATO manages collection activities.

Cash flow management and credit risk

1.5 There are a range of reasons why taxpayers may not be able to pay their debts when they become payable. A recently released Australian Securities and Investments Commission (ASIC) report reveals the top three causes of company failure as follows:

  • poor strategic management of business (42 per cent);
  • inadequate cash flow or high cash use (41 per cent); and
  • trading losses (32 per cent).2

1.6 Many businesses identify cash flow as the issue most likely to impact their operations ahead of wages, interest rates, fuel prices, access to credit and the strength of the Australian dollar.3 It is also commonly accepted that recently established small businesses have a relatively lower survival rate than larger businesses.4 Many new businesses may face financial pressures. For example, after the first financial year of trading, they are required to lodge an income tax return and shortly thereafter, make the first incremental prepayment under the Pay As You Go (PAYG) Instalment system. At this time, new businesses are put under additional financial pressure as they have to satisfy tax liabilities with respect to two financial years in close succession.

1.7 In an analysis of invoice payments, a debt recovery firm, Dun and Bradstreet (D&B), also found that on average, the time taken to pay debts in Australia has slowed to its lowest rate in three years. It was suggested that the slowing in payment times is evidence that businesses are facing cash flow pressures and difficulty in managing their finances.5 This concern has been echoed in other countries.6 A summary of the D&B survey findings is presented below:

Figure 1.1: Average payment times

Source: D&B.

Figure 1.2: Average payment time by industry

Source: D&B.

Figure 1.3: Average payment time by company size

Source: D&B.

1.8 The above figures show that there has been an increase in average payment times. Such increase is approaching that observed during the peak of the Global Financial Crisis (GFC) in 2008–09. Primary (forestry and mining) and secondary industries (utilities, construction, retail and finance) seem to be the most affected. Moreover, it appears that larger businesses and micro businesses have the slowest average payment times. This lends support to the submission by the Australian Small Business Commissioner (ASBC) to the Government's 'Prompt Payment Protocol' (Protocol) to address the culture of late payments. The ASBC submission states that the Protocol needs to be supported by all sectors of the business community. The submission recognises that whilst there are obvious benefits for small business, which are often more vulnerable than larger business within the supply chain, the Protocol should not be about 'big versus small' or making a particular sector accountable.7

1.9 When businesses begin to experience cash flow difficulties, they may reprioritise payments to some debtors and attempt to negotiate extended payment timeframes with others. The late payment of such debts affects the cash flows of creditor businesses that also need to cover their own operating costs, which in turn delays how quickly they can pay their own creditors and suppliers. In the D&B Survey, it was found that trade creditors are the most vulnerable to late or missed payments as 48 per cent of respondents would opt not to pay their suppliers if they were unable to pay all their expenses on time ahead of other expenses, such as utilities, rent/mortgages and bank loans.

1.10 When a business' cash flow and debts become unmanageable, insolvency action may be the only reasonable action for a creditor to recover some of the debts owed to them.

1.11 The D&B Survey also found the impact of cash flow difficulties may be widespread as, during the 2013 calendar year, 34 per cent of respondents to their survey had a supplier or customer who became insolvent or was otherwise unable to pay them.8 In another survey conducted by Jones Partners, it was observed that corporate insolvencies have continued to grow with approximately 10,000 businesses entering some form of insolvency administration each year. Furthermore, over 80 per cent of these entities are family–owned Small to Medium Enterprises (SME) employing less than 20 workers. Similarly, personal insolvencies have also continued to grow affecting approximately 30,000 individuals every year.9

1.12 Changes in the rate of insolvency are suggested by some commentators to be reflective of a number of underlying economic factors, including the economic environment, industry structure, access to credit, extent of leverage and the availability of voluntary avenues to deal with insolvency.10

Financial institutions' approach to debt

1.13 Many businesses may trade on a basis where the terms of payment specify a payment date after goods or services have been invoiced and supplied. Such payment terms are akin to a form of financial accommodation and assists businesses manage their cash flows. However, delayed payment terms also create a risk of payment default.

1.14 Financial institutions commonly provide financial accommodation. However, unlike many other businesses, they manage potential payment default, the resulting disruption to cash flow and associated collection costs by assessing the credit risk of debtors. Credit risk assessments are important for financial institutions to manage their credit risk exposure for individual transactions as well as across their entire portfolio to ensure that they have adequate capital backing and that they are adequately compensated for risks incurred.11

1.15 'Risk–based pricing' through interest rates and other fees are used to compensate financial institutions for the credit risk they hold. Generally, financial institutions will charge a higher interest rate to borrowers who are more likely to default on payment or who are unable to provide adequate security.12

Economic considerations

1.16 A free and healthy competitive environment and a dynamic SME sector is considered by some commentators to be vital to the Australian economy.13 This competitive environment has an element of 'only the fittest will survive' as many SMEs may fail causing financial hardship for owners, workers and creditors. However, this also demonstrates a robust appetite for commercial endeavour and entrepreneurship.14 For this reason, commentators believe that it is important that there continues to be appropriate incentives to start a business, including a framework which allows cost effective options for owners to manage their company during financial distress whilst also providing appropriate outcomes for creditors and other parties. Such frameworks for dealing with company or personal financial failure seem necessary, particularly as weaknesses across the Australian economy persist according to some commentators.15

1.17 Some consider that for entrepreneurship to flourish, certain preconditions are necessary. These include efficient financial markets, a simple and transparent corporate taxation system, labour market flexibility and insolvency and bankruptcy regimes which are adapted to the realities of the business world. In this sense, they believe that government should create robust and predictable institutional and tax environments that enable trouble free entry of new ventures and expedite the exit of failed ventures.16

1.18 During an economic downturn, it is generally expected that tax compliance risks, will grow together with the need for greater taxpayer support. However, 'tolerating'

non–compliance is not considered an appropriate response to economic difficulty because it is distortionary, inequitable and hampers the rebuilding of the tax base over the medium term.17 Some commentators recommend that in such circumstances, the focus should be on containing non–compliance but also helping taxpayers to cope with financial distress by:

  • expanding assistance;
  • focusing enforcement on the highest revenue risks;
  • ensuring legislation facilitates administration; and
  • improving communication and community outreach.18

Tax debt

1.19 'Taxation' is generally considered to be a compulsory payment raised for Government and public purposes. It is not a payment for services rendered or a penalty, the extraction of which is not arbitrary and the liability for which is not incontestable.19

1.20 Raising revenue through taxation to fund Government activities and public purposes, such as welfare and defence, is a fundamental feature of modern societies.20 Indeed, it has been said that 'taxes are what we pay for a civilised society'.21

1.21 The ATO is responsible for managing the tax and superannuation systems as well as optimising the collection of the vast majority of the Commonwealth's revenue.22 Accordingly, the way in which the ATO collects taxes may impact upon Government policy and services for Australians as well as the operation of commercial enterprise and the broader economy.

1.22 The ATO calls for the lodgment of annual income tax returns23 requiring taxpayers to provide relevant information to quantify the tax to be collected. For full
self-assessment taxpayers, such as companies, corporate unit trusts, public trading trusts and superannuation funds, the lodged return is deemed to be an assessment. From 1 July 2012, this approach was extended to indirect taxes. For partial
self-assessment taxpayers, such as individuals, the ATO uses the information in their tax return to ascertain the amount of taxable income and tax payable. A 'Notice of Assessment' (NOA) containing this information is then issued to the taxpayer.24

1.23 Certain taxpayers' liabilities are also collected, for example, through the
PAYG system for salary and wages following the lodgement of an Instalment Activity Statement (IAS).25 For Goods and Services Tax (GST) purposes, it is collected through a Business Activity Statement (BAS)26.

1.24 A Running Balance Account (RBA) is used by the ATO to record liabilities and payments made on a single account for each taxpayer.

1.25 In relation to a BAS or IAS, the ATO updates the taxpayer's RBA to record any liability amounts or payments made. If the amount of tax paid throughout the year exceeds the tax assessed, the taxpayer may be entitled to a refund. If insufficient tax has been paid the ATO will advise the taxpayer of the outstanding tax payable.

1.26 Dates for the lodgment of tax returns and activity statements as well as the payment of liabilities vary according to the type of taxpayer entity and their previous lodgment compliance.27 The ATO, however, has discretion to alter the date on which the tax is payable by granting an extension of time or allowing payment to be made by instalments.28 A General Interest Charge (GIC) accrues from the due date of the original payment, which is generally 21 days after lodgment is required or an assessment is issued,29 until the tax liability is paid. The ATO retains discretion to remit any or all of the interest.30

1.27 Any tax liability that remains unpaid after it has become due and payable is a 'debt' to the Commonwealth of Australia and recovered in any court of competent jurisdiction by either the Commissioner of Taxation (Commissioner) or a Deputy Commissioner.31

1.28 Certain submissions to this review made comments that some taxpayers may not comply with their lodgment requirements in an effort to avoid or delay tax liabilities being raised and tax becoming payable. In addition to GIC, Failure to Lodge (FTL) penalties will be charged for each 28 day period (or part thereof) up to a maximum amount (currently between $850 and $4,250 depending on the size of the taxpayer).32 In some cases, the ATO may also issue a default assessment where lodgment has not occurred.33 Where the ATO issues a default assessment, administrative penalties between 75 per cent and 95 per cent of the tax–related liability will be applied depending on the taxpayer's compliance history.34

1.29 The IGT has previously reviewed the ATO's approach to the non–lodgment of individual income tax returns in 2009 and made recommendations aimed at improving compliance with lodgement obligations. Whilst the ATO's management of non–lodgment is beyond the scope of this review, it is important to keep in mind that non–lodgment has bearing on the level of debt in the revenue system and may be an important part of any revenue authority's strategies for addressing tax debts.

Reporting tax debts

1.30 The ATO publicly reports on the levels of tax debt as at the end of each financial year in its Annual Reports. The Annual Reports account for tax debt using three main categories which are:

  • collectable debt — when liabilities are due and payable and not subject to dispute or the taxpayer is not subject to some form of insolvency administration;35
  • disputed debt — when liabilities are due and payable but are the subject of a dispute under Part IVC of the Tax Administration Act 1953, for example, an objection, tribunal review or a court appeal;36 and
  • insolvent debt — when liabilities are due and payable but the taxpayer is subject to some form of insolvency administration.37

1.31 The ATO also reports specifically on debts which are 'written off'38 being those which are determined to be:

  • irrecoverable at law (that is, bankruptcy or wind up); and
  • uneconomic to pursue.39

1.32 For insolvent amounts and those which are written off, the ATO makes provision for bad and doubtful debts, according to its Annual Report. An estimate of the amount which is not expected to be recovered is also provided in the ATO's Annual Reports. The provision for bad and doubtful debts is offset against total gross taxation receivables which provide an estimate of the collectable amounts (net total taxation receivables).40

1.33 Debts are automatically characterised as collectable when the date for payment in the ATO's systems has passed. The ATO manually changes the characterisation where the taxpayer notifies the ATO of a dispute or insolvency and the relevant record is inputted against the taxpayer's account.41

1.34 Internal ATO reports, known as 'Debt Knowledge Updates' that report and analyse the level of debt holdings are sourced from ATO systems and provided to senior officers on a monthly basis. These reports are used to monitor the ATO's performance against strategic objectives.

Composition of total debt managed by the ATO

1.35 Internal ATO reports state that approximately 89 per cent of taxes are paid on time which equates to 75 per cent of taxpayers. Of the amounts which are not paid on time, 97 per cent are paid within 12 months, corresponding to 92 per cent of taxpayers.42

1.36 However, the ATO acknowledges that it is facing challenges with managing tax debts. It has not met its deliverables or its Key Performance Indicators (KPI) for collecting and managing tax debts in the last two financial years as shown in its
2013–14 Annual Report, reproduced below.43

Figure 1.4: Recent ATO debt targets

Commissioner of Taxation.

Gross Domestic Product and composition of total tax debt

1.37 It is commonly accepted that the level of tax debt may be as a result of underlying economic activity.44 Economic activity may be measured using Gross Domestic Product (GDP). The following shows the total amount of tax debt as a proportion of GDP from the 2010–11 to 2013–14 financial years.

Table 1.1: Amount of total tax debt managed by the ATO as a proportion of GDP over 2010–11 to 2013–14
  2010–11 (in $m) 2011–12 (in $m) 2012–13 (in $m) 2013–14 (in $m)
Total debt 26,859 30,859 32,214 35,344
Percentage change from prior year (debt) 14.89% 4.39% 9.72%
GDP (a) 1,430,682 1,483,295 1,520,622 1,558,398
Percentage change from prior year (GDP) 3.68% 2.52% 2.48%
Percentage of GDP 1.88% 2.08% 2.12% 2.27%

Source: ATO data; Australian Bureau of Statistics, S 5206.0 Australian National Accounts: National Income, Expenditure and Product, Table 1. Key National Accounts Aggregates.

(a) GDP = Gross domestic product: chain volume measures. GDP has been calculated by totalling the September, December, March and June quarters for each financial year.

Note: Figures and percentages are rounded.

1.38 Table 1.1 shows, whilst GDP has increased over time, total tax debts have also increased but at a faster rate such that the percentage of debt as a proportion of GDP has risen year-on-year from 1.88 per cent in 2010–11 to 2.27 per cent in 2013–14.

1.39 The total amount of tax debt managed by the ATO from the 2010–11 to

2013–14 financial years by type of debt is set out in the table below.

Table 1.2: Composition of total tax debt managed by the ATO over 2010–11 to 2013–14
Type of debt 2010–11 (in $m) % of total 2011–12 (in $m) % of total 2012–13 (in $m) % of total 2013–14 (in $m) % of total
Collectable 14,736 55% 16,833 54% 17,943 56% 20,316 57%
Disputed 7,064 26% 8,200 27% 9,180 28% 8,481 24%
Insolvent 5,059 19% 5,825 19% 5,091 16% 6,547 19%
Total

26,859

100% 30,858 100% 32,214 100% 35,344 100%

Source: IGT analysis of ATO data.

Note: Figures and percentages are rounded.

1.40 Table 1.2 shows that over this four year period, collectable debt has comprised the majority of total tax debt (55–57 per cent), followed by disputed debt (26–29 per cent) and insolvent debt (16–19 per cent). The percentage of collectable debt has slightly increased as a proportion of total debt from the 2010–11 financial year to the
2013–14 financial year from 55 per cent to 57 per cent respectively.

1.41 The proportion of disputed debt rose from 26 per cent to 29 per cent over the first three years and then fell by 5 per cent to 24 per cent in 2013–14.

1.42 Lastly, the proportion of insolvent debt has stayed constant at 19 per cent, with the exception of the 2012–13 year when the percentage dropped to 16 per cent of total debts.

1.43 The graph below in Figure 1.5 uses the data in Table 1.2 to visually represent the above movements in the levels of collectable, disputed and insolvent debts respectively.

Figure 1.5: Composition and trend in total tax debts over 2010–11 to 2013–14

Source: IGT analysis of ATO data.

Net tax collections and collectable debt

1.44 A key performance indicator for many revenue authorities is the ratio of collectable debt to net tax collections (which excludes any transfer payments).45 The following table sets out the ratio of collectable debt to net tax collections from the 2010–11 to 2013–14 financial years.

Table 1.3: Ratio of collectable debt to net tax collections over 2010–11 to2013–14
Type 2010–11 2011–12 2012–13 2013–14
Collectable Debt ($B) 14.1 16.6 17.7 19.5
Net tax collections ($B) 273.0 301.0 311.8 321.6
Ratio 5.2% 5.5% 5.7% 6.1%

Source: ATO communication to the IGT 29/1/15

1.45 The above table shows that whilst net tax collections have increased, so has collectable debt but at an increased rate such that the ratio of collectable debt to net tax collections has increased from 5.2 per cent at 30 June 2011 to 6.1 per cent at
30 June 2014.46

Composition of collectable debt

1.46 As mentioned earlier, collectable debt is the largest proportion of total tax debt. It is broken down by market segment in the following table for the financial years
2010–11 to 2013–14.

Table 1.4: Composition of total collectable debts by market segment over 2010–11 to 2013–14
Market Segment 2010–11 (in $m) % of total 2011–12 (in $m) % of total 2012–13 (in $m) % of total 2013–14 (in $m) % of total
Individuals 2,450 16% 2,914 17% 2,854 16% 3,150 16%
Small business 9,046 60% 10,090 59% 10,966 60% 12,459 60%

Large business

265 0%
(0.02%)
530 0%
(0.03%)
575 0%
(0.03%)
245 0%
(0.01%)
Other 3,205 23% 4,046 24% 4,334 24% 4,928 24%
Total 14,967 100% 17,049 100% 18,154 100% 20,538 100%

Source: IGT analysis of ATO data.

Note 1: Figures and percentages are rounded.

Note 2: 'Other' category, includes government, medium business and not for profit entities.

1.47 As evidenced by the table above, the main contributor to collectable debt is the small business market segment. Since 2010, the amount of small business collectable debt has increased by approximately $1 billion each year over 2010–11 to 2012–13 and by more than $2 billion in 2013–14. On the other hand, large business forms a negligible amount of collectable debt. The relative proportions of the different market segments' contributions to collectable debt have remained fairly constant over the 2010–11 to 2013–14 financial year period.

1.48 Small business collectable debt, approximately 60 per cent of total collectable debt, may be further broken down by turnover range. The following table shows the breakdown for the 2010–11 to 2013–14 financial years.

Table 1.5: Composition of total small business collectable debt by turnover range over 2010–11 to 2013–14
Small Business 2010–11 (in $m) % of total 2011–12 (in $m) % of total 2012–13 (in $m) % of total 2013–14 (in $m) % of total
$0–$500K 6,815 75% 7,626 76% 8,228 75% 9,169 74%
$500K–$1M 1,155 13% 1,320 13% 1,453 13% 1,516 12%
$1M–$2M 1,066 12% 1,137 11% 1,277 12% 1,774 14%
$2M or more 11 0% 7 0% 8 0% 1 0%
Total 9,046 100% 10,090 100% 10,966 100% 12,459 100%

Source: IGT analysis of ATO data.

Note: Figures and percentages are rounded.

1.49 The table above shows that approximately 75 per cent of small business collectable debt is in the $0 to $500,000 turnover range. The ATO defines businesses with this turnover range as micro businesses. Over the four year period, the proportion of micro business collectable debt has increased by one percentage point in 2011–12 and then decreased by a percentage point each year thereafter.

1.50 The proportion of small business collectable debt within the $500,000 to $1 million turnover range has stayed at 13 per cent from 2010–11 to 2012–13 and then decreased by one percentage point in 2013–14. The $1 million to $2 million turnover range has varied between 11 per cent and 14 per cent over the four years and there was no noticeable change in the $2 million or more turnover range due to the comparatively smaller amounts of collectable debt in this segment.

1.51 Micro business collectable debt, being the largest proportion of small business collectable debt, requires further analysis. The ATO's systems facilitate such analysis by the age of the debt.

1.52 The table below segments micro businesses collectable debt by age for the 2012–13 financial year. The table also distinguishes between income tax and other debt types.

Table 1.6: Composition of total micro business collectable debt by age and debt type in 2012–13
Micro business 0–2 mths old (in $m) % of total 2–6 mths old (in $m) % of total >6mth old (in $m) % of total Total debt % of total
Income tax 1,417 10% 1,849 13% 1,858 13% 5,124 37%
Other 1,922 14% 3,454 25% 3,526 25% 8,902 63%
Total 3,339 24% 5,303 38% 5,384 38% 14,026 100%

Source: IGT analysis of ATO data.

Note: Figures are rounded and may not align to Table 1.5 due to how the ATO categorises micro businesses.

1.53 Two observations may be made in relation to Table 1.6 above. First, the 'other' debts comprise the largest amounts of micro business collectable debts (63 per cent). Secondly, the majority of both income tax and other debts are aged less than 6 months (62 per cent).

1.54 Table 1.7 below specifies the total amount of individual taxpayer collectable debt by age bands for the 2012–13 financial year.

Table 1.7: Composition of total individual collectable debt by age in 2012–13
  Individuals
AGE Quantum ($) % of total
0 –2 months 897,368,280.56 30.28%
2 – 6 months 437,806,973.78 14.78%
6 months – 1 Year 430,910,677.92 14.54%
1 – 2 years 478,738,145.25 16.16%
2 + years 718,316,921.03 24.24%
Total 2,963,140,998.54 100.00%

Source: IGT analysis of ATO data.

Note: Total individual collectable debt may not align to Table 1.4 due to the data sourced from different ATO systems.

1.55 The table above shows that a large proportion (30 per cent) of individual collectable debt is less than two months old after which it remains fairly constant
(14 to 16 per cent) until it spikes again in the more than two years old range
(24 per cent). Compared to Table 1.6 above, there is a greater proportion of individual collectable debt that is aged greater than 6 months (55 per cent).

Composition of total insolvent debt

1.56 The table below shows the amount of insolvency debt from the 2010–11 to 2013–14 financial years, stratified by market segment.

Table 1.8: Composition of total insolvent tax debt by market segment over 2010–11 to 2013–14
Market Segment 2010–11 (in $m) % of total 2011–12 (in $m) % of total 2012–13 (in $m) % of total 2013–14 (in $m) % of total
Individuals 488 9% 579 10% 391 7% 430 6%
Small business 3,506 67% 4,006 66% 3,466 65% 4,321 64%
Large business 313 6% 57 1% 106 2% 62 1%
Other 923 18% 1,416 23% 1,385 26% 1,987 29%
Total 5,230 100% 6,058 100% 5,348 100% 6,791 100%

Source: IGT analysis of ATO data.

Note: Figures and percentages are rounded.

1.57 Table 1.8 above shows that small businesses account for 64–67 per cent of insolvent debt. It is also noteworthy that, generally, there is a small decline in insolvent debt for all market segments, as a percentage of the total, except for the 'other' category which represents government, medium businesses and not-for-profit entities.

1.58 The table below shows the small business insolvency debt from the 2010–11 to

2013–14 financial years broken up by turnover range.

Table 1.9: Composition of total insolvent small business tax debt by turnover range over 2010–11 to 2013–14
Small Business 2010–11 (in $m) % 2011–12 (in $m) % 2012–13 (in $m) % 2013–14 (in $m) %
$0–$500K 2,842 81% 3,143 78% 2,568 74% 2,540 59%
$500K–$1M 362 10% 412 10% 422 12% 1,228 28%
$1M–$2M 298 8% 449 11% 468 14% 552 13%
$2M or more 4 0% 3 0% 7 0% 1 0%
Total 3,506 100% 4,006 100% 3,466 100% 4,321 100%

Source: IGT analysis of ATO data.

1.59 The table above shows that the micro business market segment has the largest amount of insolvency debt compared to other small business turnover segments. The micro business proportion of total insolvency debt has steadily decreased from approximately 81 per cent in 2010–11, to approximately 78 per cent, 74 per cent and 59 per cent in 2011–12, 2012–13 and 2013–14 respectively. However, over time, it appears that small businesses with turnover between $500,000 and $1 million almost tripled their amounts of insolvency debt from $422 million in 2012–13 to $1.228 billion in 2013–14. Insolvent debts for small businesses with turnover above $2 million have also varied over this time but continue to represent a negligible amount of total insolvency debt.

Recovery of tax liabilities

1.60 The Commissioner has a number of methods to recover debts which are:

  • payment by instalments (payment arrangements);
  • garnishee notices;
  • DPNs;
  • freezing orders (also known as Mareva injunctions);
  • DPOs;
  • security;
  • offsetting credits with debits; and
  • insolvency action.47

1.61 The ATO takes a different approach where debts are disputed. Each of these mechanisms and the disputed debt approach are described in more detail in the sections below.

Payment arrangements

1.62 The Commissioner may accept the payment of the debt by way of instalments (payment arrangements). The Commissioner is not obliged to accept payment arrangements and makes such decisions based on risk.48 As part of this risk analysis, if the prospects of recovery in the longer term would be diminished or the revenue would be disadvantaged, payment arrangements will not be accepted.49

1.63 In deciding whether to accept a payment arrangement, the ATO expects staff to consider and apply the practice statement where relevant.50 The main considerations outlined in the practice statement are the:

  • information provided by the taxpayer and any other information;
  • circumstances that led to the inability to pay, the taxpayer's current financial position and actions taken to rearrange finances or borrow to meet the debt;
  • stage that any legal recovery action has reached and the grounds offered by the taxpayer to justify a request that further legal action be deferred as well as alternative recovery options that may result in quicker payment;
  • taxpayers' ability to pay the debt without seriously impacting the taxpayer's ability to meet other obligations, including the solvency of the taxpayer and arrangements made with other creditors to pay debts;
  • risk to the revenue by accepting the payment arrangement and whether that risk could be overcome by seeking some form of security;
  • taxpayers' compliance with other tax obligations or commitments (for example, lodgment) and the history of the taxpayer's prior dealings with the ATO; and
  • willingness of the taxpayer to enter into direct debit arrangements if possible as well other conditions under which the ATO will agree to a payment arrangement.

1.64 The ATO may conduct a review of the taxpayer's viability and capacity to pay using its support tools and calculators, such as the Business Viability Assessment Tool (BVAT) and an Independent Viability Assessment (IVA) which are described in more detail in a later section. Similarly, the ATO also has a tool to help determine an individual's capacity to pay—called the Debt Serviceability Tool (DST). The BVAT, independent viability assessments and DST are further described later in this chapter.

1.65 The ATO has advised that any assessment of the taxpayer's viability and capacity to pay, by the above support tools, is not conclusive by itself and is only intended to support officers in making decisions. For example, such assessments may be considered in combination with other information, such as future cash projections. Where it is determined that the taxpayer is not viable or does not have capacity to pay, payment arrangements will not be accepted by the ATO and formal recovery action may commence.51

1.66 As part of the payment arrangement process, taxpayers are requested to make an upfront payment according to their capacity.52 The ATO generally encourages such payments to be at least 20 per cent of the outstanding debt. However, a payment of up to 50 per cent may be required depending on the level of risk or where debts are disputed.53

1.67 The ATO also acknowledges that there will be instances where the timeframe to pay may extend over more than one financial year depending on a range of factors, such as the capacity to pay, the size of the debt and the likely costs of alternative recovery activity. In these circumstances, taxpayers may be required to provide security where there are concerns about their solvency or their ability to meet the payment terms proposed.54

1.68 Where a significant change in the taxpayer's circumstances occurs, the ATO may, having regard to any representations that have been made by the taxpayer, vary the terms of the arrangement or proceed to recover the debt in full.55

1.69 A taxpayer may contact the ATO to enter into a payment arrangement. Decisions to accept or reject payment arrangements are made by ATO staff within the scope of pre–determined authorisations. These are set out below.

Table 1.10: ATO staff authorisations to accept and refuse payment arrangements
Officer level Cadet APS1 APS1 APS2 APS3 APS4 APS5 APS6 EL1
Accept arrangements
Max period 24mths 24mths 12mths 24mths 24mths 36mths 36mths
Max amount $500k $25k $50k $150k $500k $1.5m $2.5m $5m
Refuse arrangements
Max period
Max amount $500k $50k $150k $500k $1.5m $2.5m $5m

Source: ATO, Taxation Authorisations Guidelines (Internal ATO document, November 2014).

Garnishee notices

1.70 Where tax liabilities are not paid by the due date, the ATO will use various methods to recover the debt that is considered the most appropriate for dealing with the tax debtor.56 One method is that the ATO may collect tax from any person owing money to the taxpayer, including liquidators, receivers, trade debtors, bank accounts and certain agents.57 Where a third party owes money to the taxpayer, the ATO may at any time, by notice in writing (garnishee notice) to both the taxpayer and third party, require the third party to pay to the ATO the monies owing (up to the amount of tax due) in order to meet the tax debt.58

1.71 The ATO states that, generally, garnishee notices are issued to taxpayers who have failed to engage with the ATO to satisfy their debts, such as situations where:

  • taxpayers have not kept their commitment to provide additional information;
  • taxpayers have not responded to the Notice of Intended Legal Action (NILA) or a Firmer Action Warning (FAW) letter; or
  • a suitable payment plan was unable to be negotiated.59

1.72 In determining whether to issue a garnishee notice, the ATO directs officers to have regard to:

  • particular circumstances of the taxpayer, such as their financial position (for example, the taxpayer is in receivership, a lower income earner or on Centrelink benefits)60 and the steps taken to make payment;
  • the extent of any other debts owed by the taxpayer;
  • whether the revenue is at risk due to the actions of the taxpayer, such as paying other creditors in preference to the ATO; and
  • the impact of issuing a notice on a taxpayer's ability to provide for their family or to maintain the viability of a business.61

1.73 The ATO expects its staff to consider the case history and take a 'whole of client' approach to verify the decision to issue a garnishee notice.62

1.74 The ATO considers that garnishee notices to a third party are often an efficient and cost effective way of obtaining payments of outstanding tax debts and may be used in a number of circumstances.63

1.75 The ATO directs its staff to not issue garnishee notices in a range of circumstances including where a debt is disputed, recovery action is otherwise deferred, taxpayers have an active complaint or the debt is referred to an external debt collection agency.64 However, in high risk cases, the ATO may depart from these rules for strategic reasons.65

1.76 The ATO generally requires staff to ensure taxpayers are fully informed of intended firmer recovery action. Taxpayers are considered to have been warned of potential garnishee action after receiving a warning letter, such as FAW letters or 'notices of intended legal action'.66 However, in higher risk cases where there are 'compelling strategic reasons',67 the ATO may permit the issuing of garnishee notices without warning:

The notice can be used as soon as an assessment is validly served, and even before the due date for payment has passed. Where a garnishee source has been identified, but the likely financial return is considered insignificant relative to the quantum of the debt, a garnishee is still considered a highly–effective recovery tool to encourage engagement.

The Commissioner will consider any reasonable request from a taxpayer to either withdraw or vary a garnishee notice, preferably once the taxpayer makes suitable alternative arrangements for payment – which makes garnishee notices effective in encouraging engagement and ongoing compliance.68

1.77 Standard garnishee notices may be used for fixed amounts, whereas point in time notices may be used to secure a proportion of funds.69 For point in time garnishee notices, ATO staff are directed to minimize the impact on employees or the taxpayer's ability to pay everyday expenses, such as food, water and other living expenses. The Debt Reference Manual (DR Manual) notes that it is generally inappropriate, other than in exceptional circumstances, to garnish all of the money in the taxpayer's accounts or issue a garnishee of 100 per cent of money owed by trade debtors. The DR Manual outlines a range of situations and amounts for which point in time garnishee notices are commonly issued, including those to:

  • financial institutions which are generally for 30 per cent of available money (the ATO expects financial institutions to check all accounts held in a taxpayer's name) but the proportions are decided on a case–by–case basis;
  • trading accounts which are for amounts being the lesser of 30 per cent of the outstanding debt or 30 per cent of gross sales less gross salary and wages;
  • trade debtors which for the lesser of 30 per cent of the outstanding debt or
    per cent of the trade debt; and
  • employers which are for varying amounts depending on taxpayers' circumstances, for example, if the taxpayer is married or with dependents,
    20 per cent of their gross wage.70

1.78 The ATO may also exercise 'strategic discretion' as to the debt amount to be included and the rate to be paid.71

1.79 The ATO has tiered authorisations for staff to issue garnishee notices depending on the amount to be garnished. These are shown in the table below.

Table 1.11: ATO staff authorisations to issue garnishee notices to third parties
Officer level APS1 APS2 APS3 APS4 APS5 APS6 EL1 EL2 SES
Amount N/A $50K $250K $1mil

Source: ATO, 'Taxation Authorisations Guidelines' (Internal ATO document, November 2014).

1.80 There may be occasions where it is necessary for the ATO to either amend, reduce, revoke, vary or withdraw a garnishee notice. For example, where the debts for which garnishee notices were issued have either increased or decreased, the notice was issued in relation to funds that are not the property of the taxpayer (for example, amounts held on trust) or amounts obtained due to bank error. The ATO procedures direct officers to consider any reasonable request from a debtor to change or withdraw the requirements of a garnishee notice if the debtor makes alternative and satisfactory arrangements for payment of the debt. Such a decision must be made in consultation with a coaching officer.72

Director Penalty Notices

1.81 Pursuant to section 269–20 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953), company directors may incur a personal liability for unpaid PAYG Withholding and Superannuation Guarantee Charge (SGC) liabilities of their company, including estimates of those liabilities. Where such a penalty is incurred by a director, the Commissioner will issue a DPN.73

1.82 The ATO must not commence recovery proceedings until 21 days after the director is given a DPN.74 Any recovered amounts will trigger a parallel reduction of the company's liability. ATO staff at or above the APS 3 level have authorisation to issue DPNs.75

1.83 There are several variants of DPNs. For example, in cases where the liability was not reported within three months of the due date, it will continue to be owed by the director, even where the company is subsequently placed into voluntary administration or liquidation. These 'locked–down' penalties will be represented on a separate notice for clarity.76

1.84 Appendix 2 of this report contains flow charts which describe the process for issuing DPNs with respect to PAYG Withholding, Superannuation Guarantee Charge (SGC) and for new directors. Figure A2.2 describes the process for PAYG Withholding. Briefly, the process begins with a company registering for PAYG Withholding with the ATO. Once the company starts to pay wages, it is required to lodge periodic activity statements. If the activity statement is lodged by the due date but payment is not made or if lodgment occurs within three months of the due date, the ATO will attempt to contact the company. If the debt remains outstanding, other collection actions will be considered, such as garnishee action. If the company does not engage with the ATO after such action, the ATO, will issue a standard DPN. Where lodgment is not made within three months of the due date, the ATO will continue to attempt contact. Where contact is unsuccessful, the ATO will issue a 'lockdown' DPN.

1.85 Figure A2.3 describes a similar process with respect to superannuation guarantee obligations. However, at the outset, the ATO considers whether payment has been made to a superannuation fund by the due date. If not, then a similar process to DPNs being issued with respect to PAYG Withholding occurs.

1.86 Figure A2.4 describes the process in relation to new company directors. If lodgments are made by the due date or within three months of the appointment of a new director, but not paid within 30 days of the director's appointment, the ATO will issue a standard DPN. If lodgments are not made within three months of the director's appointment, a 'lockdown' DPN will be issued.

1.87 Section 269–35 of Schedule 1 to the TAA 1953 sets out limited statutory defences to a DPN which are:

  • if, because of illness or some other good reason, it would have been unreasonable to expect the director to take part (and in fact they did not take part) in the management of the company at any time when a director of the company and the directors were under an obligation to cause the company to meet its payment obligation, or
  • the director took all reasonable steps to ensure the directors caused one of these three things to happen (or no such steps were available):
    • the company to comply with its obligation to pay,
    • an administrator of the company to be appointed, or
    • the company to begin to be wound up.

    In determining what are reasonable steps that a director could have taken, regard must be had to when and for how long the person was a director and took part in the management of the company, and all other relevant circumstances.77

1.88 In addition to the above defences, a director is not liable for a penalty with respect to unpaid superannuation guarantee where it has taken reasonable care and adopted a position which is based on a reasonably arguable interpretation of the relevant legislation. There is no similar defence in relation to PAYG Withholding.78

Freezing orders

1.89 A freezing order (or Mareva injunction)79 is a court order which prevents a person from accessing and dealing with their money or assets. A court may make a freezing order 'for the purpose of preventing the frustration or inhibition of the court's process by seeking to meet a danger that a judgment or prospective judgment of the court will be wholly or partly unsatisfied'.80

1.90 To justify a freezing order, the court must be of the view that there is a real and not merely fanciful risk:

that, in the absence of an injunction any assets wherever located which the respondent may have, will be dissipated or dealt with in some fashion such that the applicant will not be able to have the judgment satisfied.81

1.91 Accordingly, the ATO will generally apply to the court for a freezing order where the ATO believes there is an unacceptable risk that the taxpayer will dissipate assets so that the debts will remain unpaid.82

1.92 The ATO's risk assessment processes requires a number of elements to be addressed in relation to the court's rules as well as common law,83 which include:

  • non–payment of the debt by the due date;
  • the requirement to avoid injustice to the taxpayer by making full disclosure, including of matters that may be prejudicial to the ATO's case where ex parte application is made;
  • evidence of the existence of assets owned by the taxpayer within the jurisdiction; and
  • evidence for believing that there is a risk of the assets being moved from the jurisdiction or dissipated so that the debts will remain unpaid, including where assets are held by third parties but the taxpayer exercises control over the property or where property was transferred through sham transactions or fraudulent conveyances.84

1.93 As freezing orders may have serious consequences for a taxpayer, it may lead to substantial claims being made against the Commissioner where it is found to be unjustified. The Commissioner is ordinarily required to give an undertaking as to damages, which may be supported by a bond or other security. Accordingly, the ATO aims to ensure that the freezing order is not too wide, catching unnecessary assets or extending to assets greater in value than are necessary to meet the claim.

Departure Prohibition Orders

1.94 A DPO is an administrative instrument issued by the Commissioner which aims to ensure that Australian tax liabilities are paid by preventing a person from leaving Australia for a foreign country.

1.95 Unless authorised by a Departure Authorisation Certificate (DAC), a taxpayer who is aware of a DPO must not depart for a foreign country notwithstanding any intention to return to Australia.85 A DAC may be provided where a taxpayer is expected to return to Australia within an appropriate timeframe. Where the ATO is not satisfied in relation to the latter, it may still issue a DAC where the taxpayer has given satisfactory security, there are humanitarian grounds or it is otherwise detrimental to the interests of Australia.86 Any security provided by the taxpayer does not necessarily have to be commensurate with the size of the tax liability. In such instances, the ATO will consider circumstances, such as the risk of the taxpayer not returning to Australia, who owns the assets offered as security, the impact on the forfeiture of security on the taxpayer, the size of the security relative to the tax liability and other assets of the taxpayer as well as the willingness of the taxpayer to disclose relevant information.87

1.96 The ATO also retains discretion to vary or revoke a DPO at any time.88 A person aggrieved by the making of a DPO may apply to the Commissioner's discretion, or appeal to a Supreme Court or the Federal Court of Australia (Federal Court).89 To maintain a DPO, the ATO must be able to demonstrate to the court that the DPO is required for revenue reasons and that the recoverability of tax owing will be affected by the departure of the taxpayer from Australia. A DPO must not be used to punish a taxpayer.90 The onus, however, is on the taxpayer to show that the DPO was wrongly made and the Commissioner need not give reasons for the contention that the decision was made on reasonable grounds.91

1.97 In determining whether there are 'reasonable grounds' to issue a DPO, the ATO will take into account all relevant facts and circumstances such as:

  • whether a tax liability can be recovered, including whether known assets are sufficient to pay tax liabilities, are readily realisable and their location;
  • whether audits or recovery proceedings are in progress as well as whether the taxpayer is subject to criminal investigation;
  • the taxpayer's behaviours, such as alienating assets to associated persons, concealing assets or moving funds overseas; and
  • indications of overseas travel and the reasons for that travel.92

1.98 Following the making of a DPO, regular reviews are undertaken to ensure that keeping the DPO in force is still appropriate or requires variation.93

Securities for tax debts

1.99 The ATO may require security to be provided against assets of a taxpayer or third party in relation to existing debts or future tax liabilities to, amongst other things, secure the process of debt collection.94 It should be noted that taxpayers may also voluntarily offer the Commissioner security.95

1.100 The ATO may seek to obtain security in a range of situations, such as where:

  • a taxpayer requests the ATO to defer the time for payment of a debt or is seeking to pay a debt by instalments;
  • a debt is subject to dispute and an arrangement has been made with the ATO;
  • the taxpayer wishes to leave Australia but is not in a position to pay the debt before leaving;
  • the taxpayer is seeking a DAC from the ATO; or
  • the taxpayer appears to be dissipating assets or there is any other indication that the revenue may be at risk.96

1.101 In deciding whether to take or require security the ATO may have regard to, amongst others, the following considerations:

  • the quantum of the debt (taking into account any objection or appeal process);
  • the period of time the debt has been outstanding;
  • the taxpayer's ability to pay, including their other liabilities and arrangements made by other creditors to secure their debts;
  • the taxpayer's compliance history; and
  • the nature of the security being offered (for example, location, liquidity, value and equity in the security).97

1.102 Securities may take any number of forms, but the ATO prefers a registered mortgage from the taxpayer or a third party over freehold property where there is sufficient equity in the property or an unconditional bank guarantee from an Australian bank. The ATO will consider the taxpayer's circumstances when determining the security sought.98

Offsetting credits and debits

1.103 The ATO has advised that offsetting tax credits and debits occurs through both automatic and manual processes in ATO systems.99

1.104 Division 3 of Part IIB to the TAA 1953 mandates the ATO to offset an amount owed to a taxpayer to reduce, in whole or in part, a taxpayer's debt. In certain situations provided for under the law, the ATO may issue a refund rather than offsetting those amounts with tax debts on application by the taxpayer.100 Some laws, however, may require the ATO to pay part or all of the refund to other government agencies, such as to the Child Support Registrar, in certain circumstances.101

1.105 Amounts may also be offset between a taxpayer's accounts which the ATO maintains to record various obligations, payments and credit entitlements under the tax laws (that is, income tax account and activity statement account).102 There are a number of different types of credit amounts which the ATO may use to offset tax debts. For example, the ATO may apply the whole or part of a family tax benefit credit (other than child care benefits) to any primary tax debts.103

1.106 The ATO may also issue a refund rather than offsetting amounts where the amount owing is:

  • due but not yet payable;
  • subject to a payment arrangement and the taxpayer is complying with that arrangement; or
  • an amount to which the Commissioner has agreed to defer recovery proceedings.104

1.107 For convenience, in this report, the criteria listed above are referred to as 'Offset Criteria'.

1.108 In deciding whether to issue a refund, ATO staff are expected to balance the collection of tax and impact on the wider community, such as on those taxpayers who have paid on time, with the issues faced by the subject taxpayer if an offsetting occurs, such as serious financial hardship. The decision is subject to normal risk assessment processes, including review of the taxpayer's compliance history. Accordingly, the ATO will not issue a refund where it is determined that:

  • there is an unreasonable risk to revenue, for example, where a taxpayer is dissipating assets;
  • the taxpayer is a promoter of schemes; or
  • the taxpayer has a poor compliance history.105

1.109 Where ATO staff do not adhere to the above factors, taxpayers are entitled to request a tax refund.106

1.110 The tax authorisations in relation to decisions not to offset refunds are set out in the table below.

Table 1.12: ATO staff authorisations not to offset amounts
Officer level APS1 APS2 APS3 APS4 APS5 APS6 and above
  $5k $10k $25k $50k $250k

Source: ATO, 'Taxation Authorisations Guidelines' (Internal ATO document, November 2014).

Insolvency actions

1.111 Insolvency refers to a person's or company's inability to pay all their debts as and when they become due and payable.107 A person who is insolvent may become a bankrupt.108 A company that is insolvent may be wound up in insolvency.109

1.112 In deciding whether to take insolvency action, the ATO will have regard to:

  • all of the taxpayer's relevant circumstances, such as whether the taxpayer can demonstrate its solvency (sufficient liquid assets to enable all debts to be paid within a reasonable period of time), making arrangements to pay their debts, or trading whilst insolvent;110
  • the asset position of the taxpayer, such as whether there are assets which may be realised to satisfy the debt and whether assets have been improperly alienated as well as where there is a risk that payments made to the ATO will become voidable preference payments111 or it is not possible to assess the financial position of the taxpayer;
  • the size and nature of the debt, such as where a debt is disputed, and where it is necessary to prevent a debt from escalating;
  • whether the future income of the taxpayer would allow the debt to be fully satisfied;
  • the risk to revenue, such as if the taxpayer is dissipating their assets or deliberately limiting their ability to pay; and
  • the cost of insolvency compared to the likely return and the need to prevent debts from escalating.112

1.113 Under the bankruptcy laws the taxpayer may be required to make contributions from their future income towards their bankrupt estate if their income exceeds a threshold level.113

1.114 The ATO may also enter into agreements or arrangements under the Bankruptcy Act 1966 (Bankruptcy Act) or Corporations Act 2001 (Corporations Act) as alternatives to pursing bankruptcy or wind up actions. Under these arrangements, taxpayers present their creditors with proposals under which they would be required to discharge their debts, usually over time and by paying less than the full amount of the debt in full and final settlement.114 Two of these key agreements are provided for under Part IX and Part X of the Bankruptcy Act for individuals and deeds of company arrangement under Part 5.3A of the Corporations Act for companies.

1.115 The ATO will consider the above proposals on their merits. It will vote in favour of proposed arrangements or agreements which have no adverse features and can provide the Commonwealth with a greater proportion of the provable debt within a reasonable period than would be received under bankruptcy or liquidation. However, as a general rule, the ATO will not vote in favour of an arrangement under which non–cash items, such as shares or other property, are offered to creditors. This is due to the costs and difficulties that may arise in administering the transfer and sale of that property.115

1.116 In deciding whether to vote in favour of alternative agreement or arrangement, the ATO expects its staff to consider, amongst other things:

  • any legal advice that was obtained by the ATO;
  • the contents, comprehensiveness and adequacy of relevant reports as to the statement of affairs, the proposal and the report prepared by the trustee or administrator;
  • any liabilities not yet established, such as unissued assessments;
  • whether the debtor has made appropriate arrangements to meet future tax liabilities and the likelihood that the proposals put forward would be achieved;
  • the taxpayer's compliance history, including the extent and seriousness of any taxation offences which may have been committed;
  • any association between the debtor and other creditors;
  • other matters that are considered to be of public interest; and
  • the tangible benefit to the Commonwealth revenue that is expected to be gained from any proposed arrangement.116

1.117 The ATO has issued staff with a number of different authorisations relevant to decisions to commence insolvency actions. The key authorisations are outlined in the table below.

Table 1.13: ATO staff authorisations in relation to insolvency actions
  Officer level
Type of action APS1 APS2 APS3 APS4 APS5 APS6 EL1 EL2 SES
Creditor's petition in bankruptcy or application for winding up
Institute No No No $350K $1m $5m
Withdraw No No No $100K $1m $5m
Accept dividend
  No No $250k $1m $2m $5m
Defer legal action
Period No No 12 mths 18 mths 24 mths
Amount No No $150k $500k $1m $2.5m

Source: ATO, 'Taxation Authorisations Guidelines' (Internal ATO document, November 2014).

1.118 The extent of ATO initiated insolvencies relative to those initiated by other creditors are shown in the table below.

Table 1.14: ATO-initiated insolvency action
  2011–12 % 2012–13 % 2013–14 %
Bankruptcies ATO–initiated 519 2% 320 2% 565 3%
Total 22,176   20,874   18,592  
Wind–ups ATO–initiated 1,555 14% 1,071 10% 1,333 15%
Total 10,818   11,192   9,916  

Source: Commissioner of Taxation, Annual Report 2013–14 (2014).

1.119 The table above shows that the majority of insolvencies are not initiated by the ATO. Where the ATO does initiate insolvency, it initiates more company wind ups than bankrupting individuals.

1.120 More detailed statistics in the table below show the value of debt subject to
ATO–initiated insolvency and the amounts recovered.

Table 1.15: Debt recovered as a result of ATO-initiated insolvencies
  2012–13 2013–14
Taxpayer segment Balance Received % Balance Received %
INB $26,551,615.17 $96,207.44 0.4% $29,997,901.10 $184,635.76 0.6%
MIC $899,637,270.80 $7,074,548.12 0.8% $458,035,407.30 $14,848,027.93 3.2%
NFP $910,645.65 $22,243.32 2.4% $887,031.12 $40,311.71 4.5%
SME $71,309,849.22 $4,261,532.86 6.0% $173,412,921.46 $15,464,041.97 8.9%
Total $998,409,380.84 $11,454,531.74 1.1% $662,333,260.98 $30,537,017.37 4.6%

Source: ATO Communication to the IGT, 9 October 2014.

1.121 The table above shows that the ATO generally receives very little as a result of insolvency actions and shows that most insolvency action relates to small businesses and individuals.

Disputed debt

1.122 Unlike commercial debts, the law permits tax debts arising from disputed assessments to be recovered by the ATO before those disputes are resolved and appeal rights are exhausted. The fact that there is a dispute concerning the underlying tax liability does not defer the requirement to pay the tax and the Commissioner is entitled to take recovery action.117 However, if the dispute is resolved in the taxpayer's favour (in whole or in part), interest may be payable on the tax reversed.

1.123 As a general principle, the ATO expects that all debts, including those subject to dispute, will be paid on time.118 The ATO's approach to recovering disputed debts follows the risk of non–payment perceived by the ATO on the basis of all the relevant facts which may be continually assessed throughout the dispute.119

1.124 Where the ATO considers the dispute to be 'genuine' and there is a lower payment risk, the ATO may offer the taxpayer a '50/50 arrangement'. Under these arrangements taxpayers are required to pay all undisputed amounts and 50 per cent of the disputed debt excluding penalties — the ATO having agreed to such an exclusion in a previous IGT review.120 In return, the ATO will defer recovery of the remaining balance of the disputed debt until 14 days after the objection, review or appeal is determined and will remit 50 per cent of the GIC that would otherwise accrue on the balance of the disputed debt.121

1.125 Where a taxpayer chooses not to enter into a 50/50 arrangement and there is an unacceptable level of risk associated with the case, the ATO will commence recovery action. However, the non–pursuit of recovery action by the ATO does not constitute formal deferral. Indeed, at the review or appeal stage the ATO has amended its policy during the IGT's review, such that recovery action will commence for unpaid disputed debts where formal deferral has not been granted.122

1.126 In higher risk cases, the ATO will refuse or rescind a 50/50 arrangement and may commence collection action before a dispute is finalised, such as seeking judgment and execution thereof. In certain cases subsequently reassessed as being lower risk, the ATO may defer legal action if taxpayers can meet the requirements for deferral or provide an undertaking to the court that payment will be made within 14 days of the court's decision if the ATO is successful.123

1.127 Where the level of risk necessitates legal action, the ATO may instead require:

  • acceptable security to be provided or the payment of the debt in full or by instalments; or
  • 50 per cent of the disputed debt with the balance paid by instalments or acceptable security to be provided.124

1.128 The above approach to disputed debts is illustrated in a process map in Appendix 5.

1.129 Notwithstanding the debt recovery powers of the Commissioner, the Federal Court and State Supreme Courts retain jurisdiction to stay proceedings for recovery where the taxpayer demonstrates special circumstances which justify a departure from the aim of prompt payment of tax.125 In doing so, the court will have regard to avoiding an abuse of court process, such as through vexatious claims and ascertaining the requirements of justice in the particular circumstances. The court may also impose conditions in granting a stay of application which protects government revenue.126

ATO organisational structure for debt management

1.130 The Debt Business Line (DBL) is responsible for the overall management of tax debts payable to the ATO and is headed by a Deputy Commissioner. The DBL along with two other business lines belong to the Service Delivery Sub-plan (SDSP). The SDSP is within the People, Systems and Services Group. The reporting lines of the heads of these areas are set out in Figure 1.6 below.

Figure 1.6: ATO debt organisational structure

Source: IGT analysis of ATO information.

1.131 The DBL focuses on addressing two key enterprise risks in its management of tax debts, which are:

  • payment risk — the failure to ensure willing tax and superannuation payment participation leading to a decrease in revenue collection; and
  • debt risk — the failure to effectively manage taxpayer engagement leading to growing and aging debt.

1.132 A detailed explanation of the ATO's approach to risk management is contained in Chapter 2 of the IGT's Review into aspects of the Australian Taxation Office's use of compliance risk assessment tools.127

1.133 In addition to the management of tax debts, the DBL also has a responsibility for improving the efficiency of ATO systems and processes to make it easier for taxpayers to meet their tax obligations as well as the prosecution and legal recovery aspects of ATO debt recovery activities.128

Business units of the DBL

1.134 Until recently, the DBL had three units which conducted various debt recovery activities called 'Early Collections', 'Firmer Action' and 'Strategic Recovery'. The responsibilities of each unit with respect to the activities they undertook are set out in the table below.

Table 1.16: Responsibilities of the former units of the DBL
Activity / Product Early Collections Firmer Action Strategic Recovery
Release Yes No No
Payment arrangement Yes Yes Yes
Remission of GIC Yes Yes Yes
Non pursuit Yes Yes Yes
Garnishee Yes Yes Yes
DPN No Yes Yes
S459e No Yes Yes
Summons No Yes Yes
Bankruptcy No Yes Yes
Creditor's Petition No Yes Yes
Wind–up No Yes Yes
Judgment No No Yes
DPO No No Yes
Securities No No Yes
Disputed Debt No No Yes

Source: ATO Communication to the IGT, 12 December 2014.

Note: 'release' refers to release from payment of certain tax liabilities where a taxpayer will suffer serious financial hardship; 'non-pursuit' refers to decisions by the ATO not to pursue recovery action where debts are irrecoverable at law or uneconomic to pursue; 's 459E' refers to statutory demands served by the Commissioner as a creditor under the corporations law; 'summons' refers to processes taken by the ATO to have the court recognise that the debt is duly owed; 'judgment' refers to processes by which the ATO seeks to execute on the judgment.

1.135 However, as of November 2014, the ATO has merged the three previous units to form two units, 'Early Intervention' (EI) and 'Significant Debt Management' (SDM). The EI unit now focuses on 'single piece, high volume low–medium touch responses' whereas the SDM unit focuses on 'high value or high consequence taxpayers who represent an increased risk to revenue and integrity' of the tax system. The types of debt recovery activities which each unit undertakes are outlined in the table below. The ATO notes that this may change as it is still in the process of transitioning to the new approach.129

Table 1.17: responsibilities of the new units of the DBL
Activity / Product Early Intervention Significant Debt Management
Release Yes No
Payment arrangement Yes Yes
Remission of GIC Yes Yes
Non pursuit Yes Yes
Garnishee Yes Yes
DPN Yes Yes
S459e No Yes
Summons No Yes
Bankruptcy No Yes
Creditor's Petition No Yes
Wind–up No Yes
Judgment No Yes
DPO No Yes
Securities No Yes
Disputed Debt No Yes

Source: ATO Communication to the IGT 12 December 2014.

Note: 'release' refers to release from payment of certain tax liabilities where a taxpayer will suffer serious financial hardship; 'non-pursuit' refers to decisions by the ATO to not pursue recovery action where debts are irrecoverable at law or uneconomic to pursue; 's 459E' refers to statutory demands served by the Commissioner as a creditor under the corporations law; 'summons' refers to processes taken by the ATO to have the court recognise that the debt is duly owed; 'judgment' refers to processes by which the ATIO seeks to execute on the judgment.

Interface with compliance units and activities

1.136 The ATO developed principles by which the DBL and compliance business lines should engage with each other. The principles are intended to help optimise collection opportunities and improve the overall management of audit raised liabilities. The ATO expects that improved collaboration between the compliance business lines and the DBL would enable compliance staff to be more conscious of a taxpayer's obligation to pay liabilities raised. As a result, the ATO expects that cases would be escalated and progressed more efficiently to the DBL.130

1.137 The four key principles that the ATO has developed in this regard are:

  • a commitment to working together, while recognising the need for balance, and understanding the resourcing limitations;
  • closing the gap between the end of a compliance activity (for example, audit or complex risk assessment) and payment conversations aimed at collecting liabilities;
  • continuing conversations and direct engagement, where appropriate; and
  • commitment to working together to resolve emerging issues.131

1.138 The ATO has advised that these principles are supported by processes which allow the escalation of debt collection recommendations to the DBL where there is an indication that taxpayers are unable or unwilling to pay.132

Evolution of ATO debt management strategies

1.139 The ATO's debt management strategies have evolved since the establishment of the DBL in the early 2000s to manage debt collection and seek to apply appropriate approaches across debt types. Prior to the establishment of this business line, debt was managed in various business lines dealing with particular types of taxpayers or types of taxes. It was believed that each type of tax debt required specialist treatment.

1.140 The ATO has advised that the DBL's debt management strategies focus on encouraging compliance. Initial strategies were based on an approach called the 'V curve', referring to the pattern of debt collections over time in response to collection and recovery actions. The type of focus a debt case received generally depended on the amount of debt outstanding.

External debt collection agencies

1.141 The Organisation for Economic Co-operation and Development (OECD) has cautioned that,

Delegating functions to the private sector has several legal and policy implications that need to be considered. Tax debt is regulated by tax laws which can complicate things for private collectors. Given the level of public scrutiny and risk of violation of privacy, comprehensive governance and quality assurance frameworks associated with the referral of debts to private collection agencies are essential.133

1.142 A number of overseas revenue authorities use EDCAs to assist with the collection of tax debts with some concluding that such use was uneconomical.134 For example, in the United States, the Internal Revenue Service (IRS) used private collection agencies (or EDCAs) over the 1996–1997 and 2006–2009 periods and terminated both programs as they lost money when opportunity costs were taken into account.135 In both programs the IRS did not authorise the EDCAs to collect tax debts as they were used to assist in the IRS' collection activities, for example, locating taxpayers and securing commitments to pay their debts.

1.143 Furthermore, a recent proposal to use EDCAs in the United States has been the subject of public criticism for a number of reasons, including:

  • that EDCAs have a profit maximising objective which is fundamentally different to government's objective of maximising long-term compliance without causing financial hardship for taxpayes;
  • the IRS had referred to EDCAs lower income taxpayers who may have been pressured into unaffordable commitments which, when defaulted, were considered additional non-compliance by the IRS and adversely impacted their ability to access payment assistance in future;
  • EDCAs potentially misusing IRS-provided information, such as for the collection of commercial debts; and
  • EDCAs not being exposed to the same penalties that apply to the IRS where taxpayer protections are violated.136

1.144 Up to 2005, the ATO did not use EDCAs and its debt collection activities had traditionally focussed on functional areas addressing specific debt types through predominantly mail–based campaigns. However, overall debt holdings continued to grow largely influenced by the flow of debt each year accumulating to a backlog of approximately 1.5 million cases.137

1.145 To address the backlog, the ATO had prioritised its broad collection action towards high volume, high collection strategies for debt cases, particularly focussing on new and escalating debts. Consequently, fewer resources were directed at a gradually increasing base of low value debtors.138

1.146 To manage the accumulation of lower value debts, the ATO commissioned a pilot during 2005–06 to test the viability of utilising an established EDCA to assist with resolving certain cases within this group.

1.147 Following the pilot, the ATO established a panel of EDCAs139 in September 2011 for an initial period of two years with two one–year performance based extension options. The EDCAs are currently engaged under the last option for renewal which will expire on 27 September 2015.

1.148 Under the terms of the contracts with EDCAs, continuation of services through the extension provisions is subject to satisfactory performance as measured through KPIs. In addition, each EDCA is required to provide an annual performance report to the ATO and undergo quarterly performance reviews.

1.149 The ATO has advised that, from 28 September 2011 to 30 June 2013, a total of 801,376 cases had been referred to panel EDCAs representing a total value of $3.601 billion. Actual collections for this period were approximately $2.363 billion.140

1.150 The debt cases referred to EDCAs are contractually defined. The types of debts referred to the EDCAs include income tax, SGC and GST.

1.151 The ATO has also advised that eligibility for referral and retrieval is determined by a weekly process which is illustrated in Appendix 3. The stages of the weekly process are case selection, referral selection, generation of data extracts on new and retrieved cases, transmission of the data extracts to EDCAs and generation of reports. Once referred to an EDCA, cases continue to be assessed by this weekly process to ensure they remain eligible for referral. Cases are automatically retrieved when they no longer meet the criteria. The weekly processes are run at specific times that have been determined to factor in the needs of other cases and correspondence processes in the organisation.141

1.152 A referred case will generally remain with the EDCA for a period of up to 180 days. However, the ATO may retrieve or withdraw debt cases at any time, for any purpose.

1.153 The ATO's engagement with EDCAs and their collection of debts is explored further in Chapter 5.

Debt Reduction Team

1.154 The Debt Reduction Team was formed in 2011. The focus of the team is to reduce aged debt and to support the ATO's aim to maintain the proportion of collectable debt to collections at approximately 5 per cent.142 To achieve this proportion, the team identifies cases which are uneconomical to pursue or irrecoverable at law and 'writes off' the associated debt. The ATO reported internally that, in the 2012–13 financial year, the Debt Reduction Team had written off approximately $603 million.143

Debt Right Now program

1.155 The ATO believes that prior to the 2011–12 financial year, its approach to debt collection was 'random and ad hoc'.144 As a result, the ATO has advised that in 2011 it implemented the Debt Right Now (DRN) strategy which aimed to improve the effectiveness of the ATO's debt collection process through the implementation of an improved risk–based collection model for case selection, amongst other things.145 This collection model involves a risk assessment based on models of taxpayers' Capacity to Pay (C2P) and Propensity to Pay (P2P). The C2P model uses taxpayers' financial data from income tax returns and activity statements, amongst others things, to identify taxpayers at risk of insolvency.146 The P2P model uses taxpayers' current income tax and activity statement data (for example, age and amount of debts) as well as prior behaviour, amongst other things, to identify taxpayers likely to repay their debts in full.147

1.156 The treatment of debt cases consists of a series of actions that progressively escalate from 'softer' actions, such as reminder letters, through to 'firmer' actions, such as garnishee notices, DPNs and if the debts remain unpaid, wind up or creditor's petitions. A case's risk assessment would identify the entry point into that linear series of treatment.

1.157 Figures 1.7 and 1.8 below outline the debt recovery action to be taken for various levels of risk.

Figure 1.7: DRN treatment chart for individuals

Source: ATO.

Figure 1.8: DRN treatment chart for companies

Source: ATO.

1.158 The above figures demonstrate that where taxpayers did not engage with the ATO or where acceptable payment arrangements could not be negotiated, the severity of the ATO's action's increased progressively. Payment arrangements that were considered acceptable were also a function of the C2P and P2P models as well as tools, such as the BVAT. The early treatments (T1 to T4) were largely attempts to engage with taxpayers and entering into payment arrangements where necessary and which were conducted by the Early Collections unit. Firmer actions, such as garnishee notices and DPNs (T5–T6) were used by the Firmer Action unit. If necessary, the Strategic Recovery unit would issue section 459E statutory demands or take insolvency action. As previously mentioned, the ATO recently merged its DBL units.

1.159 Under the DRN strategy, higher risk cases were given priority.148 Lower risk and value cases, on the other hand, were expected to be addressed primarily through 'self–finaliser models', which identify taxpayers likely to pay their debts without any ATO intervention, and low cost treatments for others, such as referral to EDCAs.149 The debt case lifecycle under the DRN strategy is also illustrated in Appendix 4.

1.160 The ATO has advised that it has achieved a reduction in collectable debt, an increase in payments in full and more sustainable payment arrangements following the introduction of the DRN strategy.150 Additionally, an ATO post–implementation review of the DRN strategy reported that it had improved end–to–end efficiency.151

The Business Viability Assessment Tool

1.161 Before the implementation of the BVAT, the ATO's approach to debt collection 'did not necessarily focus on the factors critical to an effective decision'.152

1.162 In October 2009, the ATO engaged an external consultant to co–design a business viability checklist. The ATO has advised that the aim was to ensure that it supported a level playing field by not extending payment arrangements to unviable taxpayers and eroding the competitive position of viable taxpayers in the process. Such a means was to be achieved through a methodical, structured and evidence-based approach. To this end, the BVAT draws on taxpayers' financial information to evaluate the viability of their businesses via a number of solvency and other measures. The checklist was refined over time to an online tool for ATO staff and subsequently published on the ATO's website in 2012.153

1.163 The ATO has advised that the BVAT essentially provides a credit risk assessment of a taxpayer. It uses three years of historical financial information to determine whether a business is generating a profit that is sufficient to provide a return to the business owner while also meeting its commitments to business creditors or has sufficient cash resources to sustain itself through a period when it is not returning a profit.154 From this information it can identify short and medium term problems, such as changing prioritisation of creditors, time to pay, time to be paid and changes in equity.155 The BVAT also indicates the maximum monthly repayment capacity of the taxpayer. These figures provide the start of negotiations between the ATO and taxpayer and may be augmented by other tools or data as mentioned earlier in this chapter. When the BVAT indicates a taxpayer may not be viable, the ATO will refuse payment arrangements and direct taxpayers to seek financial advice.156

1.164 However, the ATO has determined that the use of the BVAT by the former Firmer Action unit revealed that the, 'vast majority of payment arrangement decisions previously made were not supported by at least a basic understanding of the taxpayer's financial performance and position'. A significant portion of these arrangement decisions also involved 'high–risk' taxpayers.157 As a result, the ATO now requires the use of the BVAT in instances where debts exceed $50,000 and the proposed payment arrangement does not align with the ATO's risk assessment of the case.158 The BVAT must also be used where there are concerns with the taxpayer's viability and before firmer recovery action is taken.159

1.165 The ATO has also advised that there is compulsory induction training for officers who use the BVAT and has recently provided voluntary refresher training, on 'keying and interpretation' as well as 'analysis and interpretation'. There is also a BVAT site leader to provide support to officers.160

1.166 During the review, the ATO has also advised that it is planning to release a BVAT 'app' which allows taxpayers to compare their performance against others in their industry by inputting high level financial data.161

Independent viability assessment project

1.167 The ATO has concluded a pilot in 2011 where optional IVAs were conducted by a third party assessor. The ATO has reported internally that the aim of the pilot was to ensure that non–viable businesses are not supported to the detriment of viable businesses and to maintain a level playing field for business. The IVA enables an 'arm's length' test on the viability of businesses with large tax debts before proceeding with costly and resource intensive recovery action. This assessment seeks to provide the ATO with assurance that actions are defensible and appropriate in such cases.162

1.168 A tiered selection based on intensity, ranging from those with no taxpayer contact to comprehensive reviews with full access to taxpayer information was recommended due to the different types/sizes of taxpayers, the varying scope of reviews necessary and the costs which range from $5,000 to $20,000. It is also proposed that taxpayers bear the costs of these reviews.163

1.169 To be eligible for a IVA, a case must have the following attributes:

  • the taxpayer is a business with debts greater than $500,000;
  • the taxpayer is willing to engage and work collaboratively as well as being prepared to submit financial information to the third party assessor;
  • the taxpayer's information can be made available; and
  • ATO recovery action will not be compromised.164

1.170 Other attributes which may indicate suitability for IVA include cases in which:

  • 96the taxpayer claims viability/solvency;
  • 97arrangements continue to fail and debt is escalating;
  • 98there is wider community impact from ATO action or increased reputation risk to the ATO. 165

Debt Serviceability Tool

1.171 The DST is used for sole traders with less than $50,000 in debt for salary and wage earners. It is based on the 'Henderson poverty line'166 (updated quarterly) which is also used by financial institutions. The ATO has advised that it adds a 20 per cent margin to apply less pressure on taxpayers. The tool was developed in conjunction with financial counsellors and the Financial Services Council. The DST, unlike the BVAT, is not publically available.

Risk differentiation framework and engagement model

1.172 The ATO now plans to replace the previous DRN strategy with a 'Risk Differentiation Framework' (RDF), which the ATO reports will inform debt case selection based on certain tolerances and triggers167 and prioritise cases where debt continues to escalate.168 A more comprehensive discussion of RDF models can be found in the IGT's Review into Aspects of the ATO's use of Compliance Risk Assessment Tools.169

1.173 In a piece of correspondence provided to the IGT by the ATO toward the end of the review, it was advised that the implementation of a new 'Analytics for Client Engagement (ACE) program' had commenced.170 The advice indicated that the program aims to prevent debts from arising and, where debts do arise, customising the 'next best action' to resolve the debt effectively. Furthermore, the program is made up of a number of analytical models which are being developed and informed by ATO research as well as being supported by the RDF. A diagrammatic representation was also provided that gives an overview of this program -
see Appendix 7.171

1.174 The ATO has advised that the above new approach is a reaction to the realisation that the post GFC climate requires a range of strategies to manage payment compliance. The ATO claimed that during the GFC, the mining industry kept payment compliance high as it was an industry with fewer taxpayers and a high level of compliance. However, as economic activity continues to move away from the mining sector to other industries, the ATO is responding by establishing a range of strategies for these industries to manage payment compliance.172

1.175 Although the majority of taxpayers pay their tax liabilities on time as shown by the earlier statistics, the ATO has identified the need to address taxpayer's issues when they arise, making it easier for them to comply and to assist them to set themselves up for the future.173

1.176 The ATO's engagement with taxpayers is expected to be in response to their risk as outlined in Figure 1.9 below.

Figure: 1.9: ATO debt engagement framework

Source: ATO, 'Debt Strategy 2014–18' (Internal ATO document, undated).

1.177 The above figure illustrates that ATO responses to taxpayers should be based on the risk they exhibit, such as whether they engage with the ATO or involve larger amounts of debt.

1.178 At the end of the review, the ATO also published a program blueprint for 'reinventing the ATO'. The blueprint describes the ATO's aspiration to build community confidence and willing participation in the tax system by 'ensuring that everyone pays the right tax at the right time …'.174

Debt complaints

1.179 Despite the evolution of the ATO's debt management strategies, its approach to collecting debts has been a persistent cause of taxpayers' complaints accounting for 23 per cent of all ATO–related complaints received by the Commonwealth Ombudsman during the 2012–13 financial year.175 The ATO has also received 3,720 complaints (containing 4,231 issues) with respect to its debt–related activities during 2013–14.176 The ATO has asserted, however, that the quantum of complaints represents less than 0.5 per cent of the number of debt cases managed by the ATO during this period.177

1.180 The table below sets out the trends in ATO debt-related complaints over the past three years.

Figure 1.10: Comparison of ATO complaints received over 2011–12 and
2013–14.

Source: ATO, 'Debt Ministerials and Complaints – Annual Report – Year Ending June 2014 (Internal ATO document, 2014).

1.181 Figure 1.10 shows that the level of complaints in 2012–13 and 2013–14 are similar but are relatively less compared to 2011–12.

1.182 The ATO has categorised the 3,720 complaints arising in the 2013–14 financial year according to the debt unit to which the complaint relates and whether the complaint was substantiated. The composition of the complaints is outlined in the table below.

Table 1.18: Composition of debt complaints by debt area in 2013–14
  Auto Action Early Collections Firmer Action Strategic Recovery, Super, Large General Total
Received 467 849 289 242 1,873 3,720
Finalised 512 999 335 261 1,665 3,772
Substantiated 56 247 57 63 270 693
% Substantiated (finalised) 10.94% 24.72% 17.01% 24.14% 16.22% 18.37%

Note: substantiated complaints are those where the ATO did not act in accordance with Taxpayers' Charter commitments.

Source: ATO, Debt Ministerials and Complaints – Annual Report– Year ending June 2014 (Internal ATO document, 2014).

1.183 Table 1.18 above shows that 3,772 complaints were finalised with 693 substantiated in the 2013–14 year (18.37 per cent of finalised complaints). Most complaints received were 'general' complaints (1,873), followed by complaints with respect to the Early Collections unit (849), 'Auto Action' treatments (467) and the Firmer Action unit (289). The areas of complaints with the greatest proportion of substantiated outcomes were in relation to the Early Collections unit (24.72 per cent), the 'Strategic Recovery, Super and Large' units (24.14 per cent) and the Firmer Action unit (17.01 per cent).

1.184 The top five specific complaints were:

  • payment arrangement requests or review (for example, complainant had been refused a payment arrangement);
  • responses not issued by the ATO (for example, ATO not responding to taxpayer correspondence);
  • disagreed amounts of debt (for example, amounts outstanding as per the ATO records were not correct);
  • offsetting credits with debits; and
  • not understanding the debt (for example, why they have generated a debt).178

1.185 Complaints received with respect to the ATO's firmer debt recovery activities are shown in Table 1.19 below.

Table 1.19: Composition of debt complaints by debt recovery activities (2014)
  Yearly Issue Total Yearly Upheld* Total   Upheld as % of yearly Issue Total   * Upheld represents a finding in favour of the client
  4252 991   23.31%      
               
  Total Quantity % of Yearly Total   Total Upheld % of Total Quantity of this issue type % of Yearly upheld Total % of Yearly Issue Total
459E Demand 14 50.00%   1 7.14% 100.00% 3.57%
Bankruptcy 28 100.00%   3 10.71% 300.00% 10.71%
Departure Prohibition Order 1 3.57%   1 100.00% 100.00% 3.57%
Director Penalty Notice 22 78.57%   3 13.64% 300.00% 10.71%
FTL - Remission Review 87 310.71%   9 10.34% 900.00% 32.14%
Garnishee 211 753.57%   22 10.43% 2200.00% 78.57%
GIC - Remission Review 183 653.57%   23 12.57% 2300.00% 82.14%
Hardship - Release/Relief 40 142.86%   8 20.00% 800.00% 28.57%
Insolvency 30 107.14%   10 33.33% 1000.00% 35.71%
Judgement 17 60.71%   1 5.88% 100.00% 3.57%
NILA 6 21.43%   1 16.67% 100.00% 3.57%
Offsetting Debt Internal 242 864.29%   28 11.57% 2800.00% 100.00%
Payment Arrangements 376 1342.86%   33 8.78% 3300.00% 117.86%
Re-raised Liability 49 175.00%   5 10.20% 500.00% 17.86%
Summons 24 85.71%   4 16.67% 400.00% 14.29%
Subtotal 1330     152      

Note: The categories listed above represent those requested by the IGT for the purpose of this review. The remaining 2,992 types of complaints are spread across multiple categories such as Response not issued to correspondence the client has sent the ATO, Disagree with debt amount, Debt not understood, Penalty or interest imposition unreasonable, Dissatisfied with content of ATO correspondence, External debt collection process etc.

Source: ATO, 'Debt Complaints Count of Complaint Issue Templates – 2014 Financial Year' (Internal ATO document, undated).

1.186 Table 1.19 above shows that the debt recovery activities generating the three largest amounts of complaints were payment arrangements (376), garnishee notices (211) and offsetting debt (242). However, those activities with the highest proportion of upheld or substantiated complaints are DPOs (100 per cent), insolvency (33.33 per cent) and hardship release (20 per cent).

Other government regulators and interested bodies

1.187 In addition to the ATO, there are a number of other government agencies that have a role or an interest in the management of debts, especially those of small business. ASIC has regulatory responsibility with respect to business actions and is concerned with insolvent trading amongst other things.

1.188 ASIC has the power to investigate insolvency complaints and in doing so, may require people to produce books or answer questions at an examination.179 ASIC also publishes monthly statistics on the number of companies entering external administration for the first time and the number of insolvency appointments.180

1.189 The Australian Financial Security Authority (AFSA) fulfils official roles created by the Bankruptcy Act 1966, amongst others, to maintain high national standards of personal insolvency practice and procedure.181 AFSA cannot initiate insolvency proceedings but has the power to investigate complaints made by creditors or debtors against bankruptcy trustees and debt agreement administrators.182

1.190 Other government agencies also have an interest in the viability of businesses, such as the ASBC, whose role is to assist small businesses and represent their concerns to government and its agencies, including the ATO in relation to recovering tax liabilities.


1 The review was commenced pursuant to section 8(1) of the Inspector-General of Taxation Act 2003. The terms of reference for this review issued on 26 May 2014, which are reproduced in Appendix 1.

2 ASIC, Report 372: Insolvency Statistics: External Administrators' Reports (July 2012 to June 2013) (2013) p 7. It should be noted that there may be multiple causes, hence why the sum of the percentages is greater than 100 per cent.

3 Dun and Bradstreet, Businesses facing cashflow squeeze (2014).

4 Reserve Bank of Australia, Small Business Finance Roundtable (2012) p 7.

5 Dun and Bradstreet, above n 3.

6 Serena Ng and Cari Tuna, 'Big Firms are Quick to Collect, Slow to Pay', Wall Street Journal(online), 31 August 2009.

7 Australian Small Business Commissioner, Submission to the Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education, Prompt Payment Protocol, August 2013.

8 Dun and Bradstreet, above n 3.

9 Jones Partners, Insolvency Report 2014: Insolvency activity & the state of the national economy— the past, present and future (2014).

10 Ibid.

11 Basel Committee on Banking Supervision, Principles for the Management of Credit (2000).

12 J E Ingersoll, 'Interest Rates' in John Eatwell, Murray Milgate and Peter Newman (eds), The New Palgrave Dictionary of Economics Online(Palgrave Macmillan, 2015); Investopedia, Interest Rate.

13 Jones Partners, above n 9.

14 Ibid.

15 Ibid.

16 The Treasury, Budget 2014-15: Budget Paper No. 1 (2014) [Statement 2: Economic Outlook].

17 John Brondolo, 'Collecting Taxes During an Economic Crisis: Challenges and Policy Options' (Staff Position Note SPN/09/17, International Monetary Fund, 14 July 2009).

18 Ibid.

19 Matthews v The Chicory Marketing Board (Vic) (1938) 60 CLR 263, 276 (Latham CJ); Australia Tape Manufacturers Association Ltd v Commonwealth (1993) 176 CLR 480, 501; MacCormick v FCT (1984) 15 ATR 437, 446; DCT (Qld) v Truhold Benefit Pty Ltd (No 2) (1985) 16 ATR 466, 469; Airservices Australia v Canadian Airlines Int'l Ltd (1999) 202 CLR 133, 178.

20 R v Barger (1908) 6 CLR 41.

21 Compania de Tobacos v Collector 275 US 87 (1904).

22 ATO, Strategic Intent (2014) pp 3-4, 6, 8; Chris Jordan, 'Reinventing the ATO – Building Trust in Australia's Tax Administration' (ATAX 11th International Tax Administration Conference, Sydney, 14 April 2014); R L Deutsch et al, Australian Tax Handbook (Thomson Reuters, 2014) [1 350].

23 Income Tax Assessment Act 1936 s 161.

24 Income Tax Assessment Act 1936 s 6(1); Income Tax Assessment Act 1997 ss 5-5(5)-(7).

25 Taxation Administration Act 1953 Sch 1 Pt 2-10.

26 Taxation Administration Act 1953 PtIIB Div 3, Sch 1 s 6-10, Divs 12-14, 18.

27 ATO, Tax Returns by Client Type (1 July 2014).

28 Taxation Administration Regulations 1976 reg 18(3); Taxation Administration Act 1953 sch 1 ss 255-10, 255-15.

29 For example, ss 5-5 and 5-15 of the Income Tax Assessment Act 1997; a full list of due and payable dates is summarised in section 250-10 of Schedule 1 to the Taxation Administration Act 1953.

30 Income Tax Assessment Act 1997 ss 5-15; Taxation Administration Act 1953 s 8AAG and sch 1 s 255-10.

31 Tax-related reliability means a pecuniary liability to the Commonwealth arising directly under a taxation law, including a liability which is not yet due and payable: Taxation Administration Act 1953 sch 1 s 255-1, s 255-5(2).

32 The quantum of the penalty depends on the size of the taxpayer and the length of time lodgment was not made: Taxation Administration Act 1953 ss 286-75, 286-80.

33 Income Tax Assessment Act 1936 s 167.

34 ATO, Default Assessment for Overdue Lodgment Obligations (July 2014).

35 Commissioner of Taxation, Annual Report 2013-14 (2014) p 251.

36 ATO, 'Collectable vs Impeded Debt' (Internal ATO document, 2011).

37 Ibid; Commissioner of Taxation 'Annual Report 2013-14', above n 35, p 50.

38 Debts which are uneconomic to pursue or irrecoverable at law and written off may be re-raised at a later date should information subsequently become available which indicates that recoverability action may now be viable: Commissioner of Taxation 'Annual Report 2013-14', above n 35, p 193.

39 Commissioner of Taxation 'Annual Report 2013-14', above n 35, pp 50, 193.

40 Ibid p 88, 226.

41 ATO, 'Collectable vs Impeded Debt', above n 36.

42 ATO, 'Debt Strategy 2014-18' (Internal ATO document, undated).

43 Commissioner of Taxation 'Annual Report 2013-14', above n 35, pp 14-17.

44 Commissioner of Taxation 'Annual Report 2013-14', above n 35, p 44.

45 OECD, Working Smarter in Tax Debt Management (2014) pp 80-81.

46 Commissioner of Taxation 'Annual Report 2013-14', above n 35, p 50.

47 Insolvency action includes legal action, up to and including the liquidation of companies or the bankruptcy of an individual, such as by way of summons, judgment, bankruptcy notice, creditor's petition, s 459E notices and wind up summons.

48 ATO, General Debt Collection Powers and Principles, PS LA 2011/14, 3 July 2014, para [56].

49 Ibid, para [63].

50 Ibid, para [61].

51 ATO, Communication to the IGT, 8 January 2015.

52 ATO, 'General Debt Collection Powers and Principles' above n 48, para [60].

53 ATO, 'Debt Engagement – Guiding Principles' (Internal ATO document, undated); ATO, 'DRN Company Matrix' (Internal ATO document, undated); ATO, 'DRN Individual Matrix' (Internal ATO document, undated).

54 ATO, 'General Debt Collection Powers and Principles' above n 48, para [60], paras [63]-[64].

55 Ibid, para [69].

56 ATO, Enforcement Measures used for the Collection and Recovery of Tax-Related Liabilities and Other Amounts, PS LA 2011/18, July 2014, paras [14]-[17].

57 Taxation Administration 1953 Sch 1 ss 260-5, 260-45(2), 260-75(2), 260-105(2).

58 Taxation Administration 1953 Sch 1 s 260-5.

59 ATO, 'Debt - Issue Point in Time (PIT) garnishee notice' (Internal ATO document, July 2014).

60 ATO, Insolvency - Collection, Recovery and Enforcement Issues for Entities under External Administration, PS LA 2011/16, 4 November 2014; ATO, 'Issue Standard Garnishee' (Internal ATO document, November 2014); ATO, 'Enforcement Measures', above n 56, paras [108]-[123].

61 ATO, 'Enforcement Measures', above n 56, para [102].

62 ATO, 'PIT garnishee notice' above n 59.

63 ATO, 'Significant Debt Management: Guidelines for Effective Case Management' (Internal ATO document, November 2014) pp 13-14.

64 ATO, 'PIT garnishee notice' above n 59.

65 Ibid.

66 ATO, 'Debt Reference Manual' (Internal ATO document, September 2014) [Garnishee notices].

67 Such as 'serious tax evasion or fraud': ATO, Communication to the IGT, 6 May 2015.

68 ATO, 'Significant Debt Management', above n 63, p 14.

69 Ibid, pp 14-15.

70 ATO, 'Debt Reference Manual', above n 66, [Garnishee notices].

71 ATO, 'Significant Debt Management', above n 63.

72 ATO, 'Debt Reference Manual', above n 66, [Garnishee notices]; ATO, 'Amend, Reduce, Revoke, Vary or Withdraw a Garnishee Notice' (Internal ATO document, July 2014).

73 Taxation Administration Act 1953 sch 1 s 269-25; ATO, 'Enforcement Measures', above n 56, para [47].

74 ATO, 'Enforcement Measures', above n 56, para [47].

75 ATO, 'Taxation Authorisation Guidelines' (Internal ATO document, November 2014) para [5.4.9].

76 ATO, 'Enforcement Measures', above n 56, paras [52]-[53].

77 Ibid, para [54]-[55].

78 Ibid, para [62]-[63].

79 Mareva Compania Naviera SA v. International Bulkcarriers SA [the Mareva] [1975] 2 Llyod's Rep 509.

80 ATO, 'Enforcement Measures', above n 56, para [169]-[170].

81 Ibid, para [175]-[178].

82 Ibid, para [171].

83 Third Chandris Shipping Corp. v. Unimarine S.A. (1979) QB 645, 668.

84 ATO, 'Enforcement Measures', above n 56, para [179].

85 Taxation Administration Act 1953 ss 14R, 14S(1), 14U, 14Z.

86 ATO, 'Enforcement Measures', above n 56, para [134]-[135].

87 ATO, 'Enforcement Measures', above n 56, para [157]-[158].

88 Taxation Administration Act 1953 s 14T.

89 Taxation Administration Act 1953 s 14V(1).

90 Skase v Cmr of Taxation (1991) 32 FCR 206 at 211; 92 ATC 4001, 4005.

91 Poletti v Cmr of Taxation (1994) 94 ATC 4639; Briggs v DCT (WA) (1985) 85 ATC 4569.

92 ATO, 'Enforcement Measures', above n 56, paras [140]-[141].

93 Ibid, paras [151]-[152], [154]; ATO, 'Departure Prohibition Orders Guidelines' (Internal ATO document, June 2014).

94 ATO, 'General Debt Collection Powers and Principles' above n 48, paras [76], [79].

95 Ibid, paras [77], [83].

96 Ibid, para [80].

97 Ibid, para [86].

98 Ibid, paras [81], [87]-[88], [108].

99 ATO, Communication to the IGT, 18 November 2014.

100 An exception to the general rule to offset is for certain small amounts where the costs associated with offsetting are excessive such that it is uneconomical to do so: ATO, Offsetting of Refunds and Credits Against Taxation and Other Debts, PS LA 2011/21, 3 July 2014, para [13]-[14].

101 ATO, Offsetting Of Refunds and Credits Against Taxation and Other Debts, PS LA 2011/21, 3 July 2014, paras [1]-[5], [9]-[10].

102 Ibid, para [1]-[5].

103 Ibid, para [87].

104 Ibid, para [18].

105 Ibid, para [16]-[18].

106 Ibid, para [12].

107 Corporations Act 2001 s 95A; Bankruptcy Act 1966 s 5(2)-(3).

108 Bankruptcy Act 1966 s 5(1).

109 Corporations Act 2001 s 459A.

110 ATO, 'Insolvency – Collection' above n 60, paras [10], [16]-[17].

111 For example, a transaction is voidable where it results in a creditor receiving more than they would receive from a company if the transaction were set aside and the creditor were to prove for the debt in the winding up of the company: Corporations Act 2001 ss 588FA, 588F.

112 ATO, 'Insolvency – Collection' above n 60, para [11].

113 Ibid, para [13].

114 Ibid, para [18].

115 Ibid, para [29]-[31].

116 Ibid, para [32].

117 Taxation Administration Act 1953 ss 14ZZM, 14ZZR; Deputy Commissioner of Taxation v Tropitone Furniture Co Pty Ltd (1991) 22 ATR 361.

118 ATO, Recovering Disputed Debts, PS LA 2011/4, 26 February 2015, paras [9].

119 Ibid, paras [5]-[6].

120 IGT, Review into the Australian Taxation Office's administration of penalties (2014) para 2.49, Recommendation 2.2.

121 ATO, 'Disputed Debts' above n 118, paras [27]-[28], [36].

122 Ibid, paras [39]-[41].

123 Ibid, paras [44], [46]-[47], [49].

124 Ibid, paras [52].

125 Re Roma Industries Pty Ltd (1976) 76 ATC 4113; Snow v DCT (1987) 87 ATC 4078, 4090; Held v DCT (Vic) (1988) 88 ATC 4315.

126 Dalco v FCT (1988) 88 ATC 4649; Re Verma; Ex Parte DCT (NSW) (1984) 84 ATC 4864, 4868.

127 IGT, Review into Aspects of the Australian Taxation Office's use of Compliance Risk Assessment Tools (2013) ch 2.

128 ATO, Communication to the IGT, 7 October 2014.

129 ATO, Communication to the IGT, 12 December 2014.

130 ATO, 'Overarching Principles: Active Compliance and Debt' (Internal ATO document, 22 January 2014) p 4.

131 Ibid, p 7.

132 ATO, 'Active Compliance Debt project: Tier 3 Project Closure Report' (Internal ATO document, 21 June 2012).

133 OECD, 'Tax Debt Management', above n 45, p 78.

134 Ibid, p 79.

135 Letter from National Taxpayer Advocate to Congress (United States), 13 May 2014, pp 4–5.

136 Ibid, pp 6-10, 12-14.

137 ATO, Communication to the IGT, 1 December 2014.

138 Ibid.

139 The current EDCA panel consists of Dun and Bradstreet, Recoveries Corporation Group Limited, Baycorp Collection Services Pty Ltd and Probe Group Pty Ltd.

140 ATO, Communication to the IGT, 11 July 2014.

141 ATO, 'The Debt Referral Process: An Overview of the Processes and Procedures used for Selecting, Referring and Retrieving Debt Cases to External Collection Agencies (Internal ATO document, 2013) pp 4, 9.

142 ATO, 'Debt Reduction Team Review' (Internal ATO document, 2013).

143 Ibid.

144 ATO, 'Office Minute' (Internal ATO document, 10 September 2012).

145 ATO, 'Debt Right Now' (Internal ATO document, 22 November 2013).

146 ATO, 'Analytical Model C2P Income Tax: Service Design for Analytics Capacity to Pay Model (Internal ATO document, undated).

147 ATO, 'Analytical Model P2P Income Tax: Service Design for Analytics Propensity to Pay Model (Internal ATO document, undated); ATO, 'Office Minute' (Internal ATO document, 28 July 2014).

148 ATO, 'Office Minute July 2014', above n 147.

149 Ibid.

150 ATO, 'News Extra' (Internal ATO document, 47(5), 2011) p 22.

151 ATO, 'Office Minute July 2014', above n 147.

152 ATO, 'Office Minute September 2012', above n 144.

153 ATO, Communication to the IGT, 18 July 2014.

154 ATO, Business Viability Assessment Tool (23 September 2013); ATO, 'Office Minute September 2012', above n 144.

155 ATO, Communication to the IGT, 14 December 2014.

156 Ibid.

157 ATO, 'Office Minute September 2012', above n 144.

158 ATO, 'Business Viability Assessment Parameters' (Internal ATO document, March 2014); ATO, 'DRN Company Matrix', above n 53.

159 ATO, 'Office Minute September 2012', above n 144, p 7; ATO, 'BVAT Parameters' above n 158; ATO, 'DRN Company Matrix', above n 53.

160 ATO, 'Standard Training Schedule – Firmer Action' (Internal ATO document, July 2014); ATO, 'Debt Skill Set – Work Activities' (Internal ATO document, undated); ATO, Communication to the IGT, 14 December 2014; ATO, Communication to the IGT, 2 March 2015; ATO, Communication to the IGT, 1 April 2015.

161 ATO, Communication to the IGT, 27 February 2015.

162 ATO, 'Independent Viability Assessment Pilot – Evaluation' (Internal ATO document, 2011) p 4.

163 Ibid, pp 7-9.

164 ATO, 'Independent Viability Assessment: Case Referral Checklist' (Internal ATO document, 2011).

165 Ibid.

166 The 'Henderson poverty line' benchmarks the disposable income required to support the basic needs of a family of two adults and two dependent children: Commonwealth, Commission of Inquiry into Poverty (1973)

167 ATO, 'Debt Strategy 2014-18', above n 42.

168 ATO, Communication to the IGT, 7 October 2014; ATO, 'Service Delivery Plan 2014-15' (Internal ATO document, 2014).

169 IGT, Compliance Risk Assessment Tools review', above n 127.

170 ATO, 'Compliance Pillars' diagram is shown in Appendix 7.

171 ATO, 'Achieving Payment Compliance Outcomes' (Internal ATO document, undated); ATO, Communication to the IGT, 11 March 2015.

172 ATO, Communication to the IGT, 1 December 2014.

173 Ibid; ATO, 'Service Delivery Overview 2014-15' (Internal ATO document, undated); ATO, 'Service Delivery Plan', above n 168; ATO, 'Service Delivery Reinventing the ATO: Transforming our Business 2014–15' (Internal ATO document, undated); ATO, 'Debt Strategy 2014-18 Roadshow' (Internal ATO document, 2014).

174 ATO, Reinventing the ATO: Program Blueprint – Summary (2015) p 4.

175 Commonwealth Ombudsman, Submission No 1 to House of Representatives Standing Committee on Tax and Revenue, Inquiry into the Australian Taxation Office Annual Report 2012-13, January 2014, p 5; Commonwealth Ombudsman, Ombudsman 2012-2013 Annual Report (2013) p 56.

176 ATO, 'Debt Ministerials and Complaints - Annual Report - Year Ending June 2014 (Internal ATO document, 2014); ATO, 'Debt Compliments Data 2013-14' (Internal ATO document, undated).

177 ATO, Communication to the IGT, 18 November 2014.

178 ATO, 'Debt Ministerials and Complaints', above n 176.

179 ASIC, Our Role (2014).

180 ASIC, Insolvency(2014).

181 AFSA, Our Roles (2014).

182 AFSA, About Regulation and Enforcement (2014).