3.1 Some taxpayers may experience cash flow difficulties that prevent them from paying their tax liabilities on time. In these circumstances, as an alternative to taking formal recovery action, the ATO may consider requests to accept payment of the debt by instalments over a period of time. Such ‘payment arrangements’ will ordinarily attract GIC until the liabilities are fully paid.284 As described in Chapter 1, the ATO largely determines whether to accept payment arrangements based on a taxpayer’s propensity and capacity to pay.

3.2 Other assistance that the ATO may consider, includes releasing taxpayers from their liabilities where they may suffer serious financial hardship or remit interest in appropriate circumstances.

Summary of stakeholder concerns

3.3 Stakeholders have raised a range of concerns in relation to the ATO’s debt payment assistance. These are described under appropriate headings below.

Payment arrangements

3.4 Stakeholders have raised many concerns regarding how the ATO determines whether to offer payment arrangements and the terms of those arrangements. An underlying theme seems to be that most ATO officers do not have sufficient capability to analyse the commercial viability of businesses and their particular circumstances, causing delays in negotiating payment arrangements.

3.5 Examples cited by stakeholders include those where ATO officers do not understand that financial information may be historical, whilst, when considering predictors of future capacity to pay, such as projected cash flows, management decisions and economic conditions, they do so without understanding that different industries have different margins and cash flows. For these reasons, stakeholders have questioned the level of training and development of ATO officers working in debt management and the veracity of the tools which support them.

3.6 Specifically, whilst stakeholders consider such tools, like the BVAT, useful to assist ATO officers, these should only be used as a starting point and not followed too rigidly given that there is no single discrete indicator of viability. Accordingly, over reliance on such tools to determine the ATO’s approach is considered to be inappropriate.

3.7 Stakeholders have also observed that the ATO will not discuss or enter into payment arrangements:

  • with certain taxpayers, including those who are unemployed;
  • in certain circumstances, such as where a company was defrauded by an employee resulting in uncertain superannuation entitlement; and
  • despite ATO requirements being met, such as where taxpayers have lodgments up–to–date.

3.8 Whilst stakeholders recognise that the ATO should not offer payment arrangements to taxpayers with no likely future capacity to pay, in a number of examples provided in submissions to this review, the taxpayers could pay their debts. In these cases, stakeholders have asserted that the ATO was being uncooperative and only through escalating matters were arrangements agreed and subsequently paid in full. Stakeholders are concerned that where payment arrangements are refused, the only alternative is insolvency proceedings. Stakeholders say this outcome is not efficient and that the ATO should work with taxpayers to come to an arrangement, particularly as bankruptcies do not result in many sequestration orders which implies that the debts were ultimately paid.

3.9 Stakeholders also believe that ATO information requests from taxpayers to prove capacity to pay when negotiating payment arrangements adds to taxpayers’ costs which causes additional financial strain. A number of stakeholders commented that the ATO should accept taxpayers’ proposed arrangements at face value. Their adherence to the arrangement would be sufficient proof of their capacity to pay.

3.10 Furthermore, stakeholders consider that the ATO intimidates taxpayers into unaffordable payment arrangements despite BVAT indications of the unaffordability of such payments. For example, stakeholders have observed that the ATO commonly pressures taxpayers to make a 50 per cent upfront payment with short payment timeframes for the remainder of the tax debt.

3.11 Accordingly, stakeholders have commented that the ATO needs to be more flexible, better consider taxpayers’ circumstances and the consequences of future debts arising. Some taxpayers are believed to agree to the ATO’s terms even though they cannot afford the payments and do not appreciate the consequences. For example, when unaffordable arrangements are later renegotiated, the ATO considers this to be a ‘default’ which makes it difficult for taxpayers to enter into arrangements in future.

3.12 Stakeholders have further asserted that ATO officers do not appear to have a consistent approach to offering payment arrangements to taxpayers with similar circumstances. An often made comment was that it appeared to be dependent on the ATO officer you get on the day. For example, in one case a tax agent was unable to secure their client a payment arrangement but the client succeeded when they contacted the ATO directly.

3.13 Stakeholders also considered that while not wide–spread, ATO officers have sometimes engaged in inappropriate behaviour, for example being overly aggressive, delaying communications or asking tax agents to guarantee their clients’ payment arrangements.

3.14 For the reasons above, stakeholders have questioned the nature of the ATO’s procedures, whether ATO officers are following those procedures and the need for better staff guidelines and training.

3.15 Stakeholders have also raised some constructive examples where officers were understanding and made payment arrangement more affordable as long the debt was being reduced and taxpayers were paying on time. Stakeholders also appreciate the ATO’s automated payment arrangement phone line for debts less than $25,000.

ATO materials

3.16 The Commissioner is not obliged to accept payment arrangements and makes such decisions based on risk, for example, a taxpayer’s propensity and capacity to pay285 as well as their individual circumstances.286 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.287 To this end, the ATO may request information from a taxpayer to support their application for a payment arrangement.288

3.17 The range of factors considered by the ATO and the determination of capacity to pay (for example, via the BVAT) in deciding whether to accept a payment arrangement were described in Chapter 1. However, the use of the BVAT is only required where debts exceed $50,000 and where the proposed payment arrangement does not align with the ATO’s risk assessment of the case.289 Where it is determined that a business is not viable or that an individual does not have capacity to pay, payment arrangements will not be accepted by the ATO and formal recovery action may commence.290

3.18 The ATO has advised that it does not have effectiveness measures for the BVAT, such as in relation to the sustainability of payment arrangements, as the tool only supports officers’ judgment. However, the ATO has advised that 57.46 per cent of pre–BVAT arrangements were defaulted as opposed to 28.17 per cent of arrangements
post–BVAT. Similarly the pre–BVAT arrangements had a ‘cancellation rate’ of 23.85 per cent as opposed to 17.57 per cent of post–BVAT arrangements.291

3.19 Towards the end of the review ATO management made representations to the IGT that a new Payment Arrangement Criteria Assessment Tool had been developed. They have indicated that this tool was based on analytical research and predictive modelling and would identify a given taxpayer who presents a high risk of not reducing their debt by a certain threshold. The tool is intended to assist ATO officers in deciding whether to grant payment arrangements to such high risk taxpayers.292

3.20 Where payment arrangements are determined to be appropriate, taxpayers are requested to make an upfront payment and finalise their debts in the shortest possible timeframe. If the ATO has concerns about the solvency of taxpayers or their ability to meet the payment terms proposed, taxpayers may be required to provide security.293

3.21 The ATO’s DBL and Customer Services and Support Business Line (CS&S) officers which handle ‘inbound requests’294 may enter into payment arrangements within the level of authorisation which was outlined in Chapter 1. The ATO has advised that it has formal training for DBL staff which includes induction, risk assessment, negotiation and financial statement training.295 The ATO expects this training, in conjunction with its relevant procedures, would assist staff, actioning lower risk cases, to enter into sustainable payment arrangements.296

3.22 For staff actioning higher risk cases, as mentioned in Chapter 1, the ATO has mandatory training on the use of the BVAT and conducted voluntary refresher training during the review. In total, 114 staff had attended the refresher training at the time of writing this report.297

3.23 During the review, the ATO also developed a tool for DBL staff to identify the number of payment arrangements which they have agreed including those that were defaulted by the taxpayer. The ATO has advised that this tool will help team leaders to identify and address skilling needs.298

3.24 A private sector secondee to the ATO, however, observed that there did not appear to be any formal training programs for new ATO staff and that investigation of taxpayers’ circumstances and analysis of their payment proposals were often overlooked even by more experienced debt staff who had demonstrated a limited capability to review payment proposals and financial statements.299

3.25 Furthermore, the secondee observed that some debt staff were not making use of all the tools made available to them such as the BVAT. Some debt staff who did use the tool, however, did not fully understand the output produced by the tool and were unsure why the tool had produced particular results.300Feedback received by the ATO’s Debt Ministerial and Complaints unit also identified a number of cases where, for relatively small debts, payment arrangements had been refused. The ATO advises that it is considering modifying the scripting to enable officers to be less rigid in conversations with taxpayers with small debt.301 As a result of this and other feedback sources, the payment arrangement conversation guidelines have been consolidated so that a taxpayer is given the same consideration regardless of whether they interact with DBL or CS&S staff.302

IGT observations

3.26 The IGT considers that many stakeholder concerns could be addressed through improved structured training and guidance materials as well as improved support tools provided to ATO officers to ensure that they make appropriate decisions in relation to determining payment arrangements.

3.27 The key capabilities in determining whether a payment arrangement should be entered and the terms of those arrangements are:

  • commercial awareness to understand how businesses and particular industries operate; and
  • credit risk assessment (for example, analysis of taxpayers’ management expertise, leverage and liquidity as well as the consequences of default and collection) based on financial information and which takes into account taxpayers’ circumstances.

3.28 The ability of ATO officers to enter into appropriate payment arrangements is important as there can be many adverse consequences for taxpayers. For example, it may create undue financial pressures for taxpayers, result in their unnecessary insolvency, impact their ability to access ATO assistance in the future if they default or adversely impact their long–term voluntary co-operation if they feel unfairly treated. Conversely, arrangements may also be entered in inappropriate circumstances which give taxpayers an unfair advantage over competitors who do not require assistance as it may effectively fund growth in circumstances where the taxpayer would otherwise be required to seek credit. Accordingly, attuned judgment is required to ensure that the ATO recovers debts which are properly due and payable in a manner that benefits the economy.

3.29 The above ATO officer capability can be developed through formal structured training and consistent on–the–job supervision. The ATO currently has induction training for all debt staff which includes basic financial awareness of income, expenses, assets and liabilities. It is also in the process of updating its coaching framework for DBL staff.

3.30 To better align its capability with its overarching strategy, the IGT believes that the ATO should expand its new training framework to also focus on improving commercial awareness, taking into account taxpayers’ circumstances and behaviours. The important behavioural elements include day-to-day aspects of business activities such as drawing on capital, extending payment timeframes to creditors and reducing payment timeframes for debtors. The level and extent of such training may need to incorporate specific needs and vary according to the type of work performed. Additionally, it is important that such training is kept up to date to ensure that staff do not lose these skills over time, particularly, if they are not used frequently.

3.31 It is also important that the experience of more senior officers is appropriately captured and disseminated to more junior staff. Whilst some ATO teams have a ‘buddying’ system, which will be more fully described in Chapter 4, the IGT notes that such buddying may be limited. The ATO’s rule of thumb is that buddying should be one–third of the time taken in training, for example where a training program has a duration of 90 minutes, buddying is expected to be 30 minutes.303

3.32 The ATO also supports officers to make appropriate decisions by providing them with a range of tools. However, there are a number of issues in relation to these tools. First, the use of such tools is not mandated in all cases. Whilst this may be an appropriate requirement as collating information is expensive for both taxpayers and the ATO, more streamlined viability and capacity to pay tools may provide high level guidance on whether payment arrangements and their terms would be suitable. A streamlined tool would also minimise costs involved for both taxpayers and the ATO in collating and processing information. During the review, the ATO had commenced planning to develop a streamlined version of the BVAT for taxpayers. This could also be used by internal staff for lower risk cases. However, the full BVAT assessment should remain available in higher risk cases. In this respect, improved staff commercial awareness and credit risk assessment would allow more targeted information requests to be made which could similarly reduce costs.

3.33 The ATO is aware that there is room to further improve its officers’ capability to determine a business’ viability as well as use of supporting tools, such as the BVAT and their understanding of the outputs. There are indications that some debt staff are not making use of the tools available for analysing financial information, whilst others, who did use the tools, did not fully understand the tools’ outputs.304 Although, it is also important that over–reliance is not placed on these tools, a better assurance system is needed to ensure that officers are following processes and making appropriate decisions (more fully discussed in Chapter 4).

3.34 The IGT believes that developing better commercial awareness and credit risk assessment capability would encourage officers to use the BVAT and encourage the use of the output of such tools to have more targeted discussions with the taxpayer. Where concerns remain with a taxpayer’s capacity to pay, rather than declining to enter into a payment arrangement, officers could ask the taxpayer to provide a plan on how they intend to pay their debt and upcoming liabilities or submit to a lower cost independent viability assessment. This would allow the ATO to better consider the appropriateness of entering into payment arrangements with the taxpayers and avoid unnecessary costs and frustration for taxpayers.

3.35 The ATO could also tailor the BVAT outcomes based on particular industries where this information is readily available. For example, the IGT is aware that the ATO benchmarks a number of cash economy industries. Such information could be used to more accurately determine business viability within particular industries.

3.36 It is also understandable that staff may be confused by debt strategies and procedures which encourage the securing of a large upfront payment as well as short timeframes when negotiating arrangements. Such requirements may possibly result in ATO officers pressuring taxpayers into unmanageable payment arrangements without fully considering their circumstances. Whilst taxpayers should be encouraged to pay their debts quickly, it should be an achievable aim in their circumstances. This needs to be better communicated to debt staff, particularly as the private sector secondee has observed that whilst the ATO has taken positive steps towards a new debt strategy, some officers have not entirely come to terms with the strategy and revert back to the previous mindset and have taken enforcement action where it was perhaps not appropriate.305 Improving capability will also ensure that ATO staff appreciate taxpayer circumstances in deciding the terms of payment arrangements.

3.37 Furthermore, the ATO does not focus on ensuring consistency of decisions between various teams. A difficulty that ATO staff face is that they may have limited access to previous quality decisions and precedents. Without access to such materials, ATO officers may be tempted to form their own perceptions of good decisions. This issue will be more fully discussed in Chapter 4.

3.38 The IGT considers that the capture and dissemination of good payment arrangement decisions and associated reasoning would be invaluable to ATO officers. Such dissemination of corporate knowledge would assist staff to elicit principles which guide them towards better and consistent decision making. This can be achieved through the creation of a searchable database which includes precedents.

3.39 The IGT believes that appropriate supervision of staff would help ensure that they engage in a timely and appropriate manner and that requests are not unreasonable or made arbitrarily. The ATO has recently developed and commenced training for staff on negotiation with taxpayers which may also assist to alleviate stakeholder concerns if it also includes training on appropriate behaviours whilst attempting to secure the payment of debts. This training has been incorporated into induction packages for new staff undertaking debt-related work. Training and supervision will be further discussed in Chapter 4.

Recommendation 3.1

The IGT recommends the ATO:

  • expand its new training framework to include programs aimed at improving the commercial awareness and understanding of taxpayer behaviours for those staff who make decisions with respect to payment arrangements; and
  • develop streamlined viability and capacity to pay tools which incorporate industry benchmarks for use in lower risk debt cases.

ATO response: Agree in Part

The ATO agrees to (a) as our Reinvention blueprint intent is to build a professional and flexible workforce with the right skills, knowledge, attitude and tools to deliver excellent client service in a collaborative, supported and trusted environment.

To date, our program of work has included a focus on professional debt collection, business performance and viability, behavioural insights, and excellence in client service (including natural conversations). We have invited members of the community and intermediaries to talk with our staff, to expand our knowledge of business operations, obtain feedback on our service and products, and insights into how we can improve (putting ourselves in the shoes of our clients).

The ATO disagrees with (b). In our high volume, low risk environment the use of additional ‘viability / capacity to pay’ tools would impose additional costs and red tape on the taxpayer, their intermediaries and the ATO, without necessarily delivering a commensurate increase in the number of sustainable payment arrangements. This would also inhibit the ATO’s ability to increase taxpayer self-management (for example, payment arrangements) through digital channels, which is widely sought by taxpayers and intermediaries with short term cash flow issues.

ATO debt release for serious financial hardship

3.40 Stakeholders have observed that the ATO rarely releases taxpayers from debts on the basis of serious financial hardship. The concern is that the requirements are set too high such that debt release is effectively non–existent.

ATO materials

3.41 The Commissioner has the discretion to release an individual taxpayer (or the trustee of a deceased estate of an individual taxpayer) from certain tax liabilities, interest and penalties in cases of serious hardship.306 As the powers are discretionary, the Commissioner may refuse debt release even where serious hardship would result from the payment of the tax liability.307 When release is granted, however, the amounts are expunged and may not be re–raised at a later date.

3.42 The term ‘serious hardship’ is not defined at law and takes its ordinary meaning. The ATO’s Practice Statement PS 2011/17 describes that it considers serious hardship to occur where the consequences of paying the tax would be so burdensome that the person would be deprived of necessities according to community standards, such as food, clothing, medical supplies, accommodation and education for children.308

3.43 The above practice statement also describes that the ATO determines the existence of hardship based on income/outgoing tests, asset/liabilities tests as well as other factors.

3.44 The income/outgoing tests aim to quantify the taxpayer’s capacity to meet the tax liability from their current income within a reasonable timeframe. Where a taxpayer incurs above–average expenditures, such as on food, clothing, travel, entertainment or motor vehicles, this would usually lead the ATO to a conclude that capacity to pay exists if such expenditures are considered discretionary.309

3.45 The assets/liabilities tests aim to determine whether a taxpayer’s equity indicates capacity to pay the tax debt as well as whether acquisition of assets have been unreasonably prioritised ahead of meeting tax liabilities. Subject to the following assets being modest, the ATO would not expect a taxpayer’s residence, furnishings or motor vehicle to be sold to meet tax debts. Other assets may be expected to be realised to meet tax debts.310

3.46 The other factors which may be considered, include whether a taxpayer has made provision for future tax debts such as disposing of assets without providing for the tax liability, other creditors such that hardship would not be avoided or paying those creditors in preference to the ATO, short term financial difficulties or poor compliance history.311

3.47 Based on the above considerations, the ATO may either not grant release or grant partial or full release. Taxpayers who are dissatisfied with the decision may lodge an objection under Part IVC of the TAA 1953, seek review by the Administrative Appeals Tribunal (AAT) or appeal to the Federal Court.312

3.48 An ATO debt hardship team processes all release applications. Any decision by the debt hardship team to release amounts greater than $5,000, grant partial release or refuse release requires two officers to support that decision.313 There is also a complex case team who may be referred more difficult cases for their review and decision, such as those involving multiple associated entities.314

3.49 The table below outlines the relevant authorisations for which officers can grant release. It is noted that these authorisations were modified during the review.315

Table 3.1: ATO staff authorisations to grant release
Officer level APS1 APS2 APS3 APS4 APS5 APS6 EL1 EL2 SES
Liability $5K $20K $50K $100K $250K

Source: ATO, ‘Taxation authorisations guidelines’ (Internal ATO document, November 2014).

3.50 The table below outlines the extent to which the ATO has granted debt release over a three–year period.

Table 3.2: Value of release granted over 2011–12 to 2013–14
  2011–12 2012–13 2013–14
  No. cases Value No. cases Value No. cases Value
Applications received 6,165 $238,731,342.60 8,878 $347,674,842.63 9,742 $384,855,099.69
Full release 2,399 $57,577,796.46 2,462 $58,189,177.04 2,266 $48,736,444.59
Partial release 40 $3,052,482.41 63 $3,586,952.33 76 $3,896,072.17
Refused 1,424 $138,288,660.90 2,723 $101,392,317.10 3,658 $149,079,093.11
Not yet decided* 1,573 $19,471,622.06 3,289 $24,926,084.12 3,968 $13,546,245.10

Note 1: applications received value is not reconciled and includes both eligible and ineligible amounts.

Note 2: refused values have not been reconciled and only includes eligible debt.

Note 3: statics provided represent ‘stock on hand’.

Source: ATO.

3.51 That ATO has also advised that between 2011–12 and 2013–14, six objections have been allowed in part with all others either invalid, withdrawn or disallowed. Furthermore, all decisions reviewed by the AAT have been upheld in the ATO’s favour.316

3.52 The ATO also periodically engages an external consultant to review a sample of debt release cases. Over the period 2012 to 2014, the consultant found that the majority of cases were in accordance with the ATO’s policies. In three sample cases over this period, the consultant found that the hardship tests were not applied correctly.317

IGT observations

3.53 Releasing individual taxpayers who would otherwise face serious financial hardship from some or all of their liabilities provides them with some financial relief. Such relief potentially reduces the level of support that may be sought from other government sources, such as Centrelink. It is also important that a level playing field is maintained amongst all taxpayers including those who are meeting their obligations and that assistance is not provided to those who are deliberately attempting to avoid their liabilities.

3.54 Any decision, as to whether an individual taxpayer may suffer serious financial hardship, is discretionary and release may not be provided even where hardship would be suffered. However, the ATO recognises that such decisions should not be arbitrary318 and refusal will be based on the three tests described in the section above. These tests attempt to provide a ‘practical structure … to ascertain whether a person would suffer’319 ‘serious hardship’ as the term is not defined in the law.

3.55 In determining serious hardship, it is important to recognise economic impacts on taxpayers’ finances, such as increased costs of living over time. Similarly, movements in social norms may also need to be analysed, for example, what may be considered ‘serious hardship’ now, may not have been in the past due to a range of factors. This is a complicated analysis for the ATO to take into account in making release decisions. Accordingly, it would be beneficial if the ATO consulted with relevant government agencies or conducted research to gain a better insight as to what may be considered ‘serious hardship’ in today’s environment. The ATO uses such an approach when determining individuals’ capacity to pay using the DST which is based on the ‘Henderson poverty line’ described in Chapter 1. The DST could also be used to analyse serious financial hardship.

3.56 As set out in the previous section, the other factors considered by the ATO as part of its third test are considerably wider than those considered in the first two tests and may lead to denial of release applications even where serious hardship would occur. Accordingly, it would be beneficial to have more guidance about the circumstances that may be considered. For example, in Watson and Commissioner of Taxation,320 despite the applicant being 61 years of age, having medical illness and with young dependent children, it was found that release was inappropriate despite the payment of tax liabilities resulting in serious financial hardship. This was because, amongst other reasons, the taxpayer’s position was largely of their own making as the applicant earned significant income when the liabilities arose but elected not to pay them. The IGT believes that, whilst guidance should be principle-based, better guidance for taxpayers around the factors and how they are weighed would provide them with greater clarity with what to expect in relation to the ATO’s debt release decisions.

3.57 The IGT also observes that the ATO’s application form does not refer taxpayers to PS LA 2011/17 and does not describe the decision stages or the factors that will be considered by the ATO in making a decision. If such reference was made, taxpayers and their advisers may be better aware of the types of information that could be provided to enable the ATO to make informed decisions without the need to request additional information. It would also engender more public confidence in this aspect of tax administration.

3.58 The IGT believes that if the application form for release incorporated the above information it may also assist to reduce the number of applications made for amounts that are ineligible for release, particularly as the ATO statistics suggest a large proportion of release applications may have been refused for this reason (up to

45 per cent).321

3.59 The underlying objective of debt release may also be effected by other means, albeit not to the extent of extinguishing the legal liability to pay. For example, where the ATO processes treat a debt as uneconomical to pursue, recovery actions may be stayed until such time that the taxpayer has capacity to pay or has generated a tax credit. Such assistance was provided in Watson and Commissioner of Taxation322 mentioned above. The IGT acknowledges that such a process is described in the ATO’s practice statement. However, the day-to-day operational Script Manager and Reference Tool (SMART) system did not discuss this type of assistance. Towards the end of this review, the ATO advised the IGT that it has now updated the SMART system to provide the appropriate guidance.

Recommendation 3.2

The IGT recommends the ATO:

  1. consult with relevant government agencies to more appropriately identify the contemporary nature of ‘serious hardship’ and to use appropriate tools in identifying individual cases;
  2. review its guidance and publications to make the circumstances clearer as to where a release is likely to be granted and where it may not be granted for ‘serious hardship’cases (including system procedures for staff decisions, such as alternatives to release).

ATO response: Agree

The ATO has commenced consultation with key financial institutions and government agencies to identify factors taken into account in assessing hardship.

We continuously review and improve our processes, including those relating to release. We are currently reviewing our broader web and other material to ensure information is easy to find and understand.

ATO remission of interest

3.60 Stakeholders have observed that interest, accumulating to amounts which are disproportionate to the underlying tax debt, may be a disincentive for taxpayers to pay. They have also observed that it has become more difficult to have interest remitted since the GFC. However, stakeholders believe that the ATO could better encourage payment by remitting interest, for example, when offering payment arrangements. The ATO could also better encourage earlier payment by stating on its payment reminders that partial remission may be considered where payment is received within a certain timeframe.

3.61 Furthermore, some stakeholders believe that tax agents should be able to remit low risk interest amounts via the Tax Agent Portal to help bring non–lodging taxpayers back into the system. Such an arrangement will be discussed in Chapter 5 in the context of the ATO’s use of EDCAs.

3.62 Stakeholders have also observed that the ATO imposes conditions on the remission of interest which they believe is inappropriate, such as remission being contingent on future economic performance which may be outside of the taxpayer’s control.

3.63 Furthermore, stakeholders contend that where the ATO does remit interest, it does so inconsistently. For example, in one case, an amount of approximately $23 in interest was outstanding which stakeholders believe would ordinarily be remitted as a matter of course. However, only after the ATO had issued a letter demanding payment, the amount was subsequently remitted.

3.64 Concerns were also raised in relation to the ATO’s remission of penalties which can form part of a taxpayer’s total debt. The IGT has considered concerns in relation to penalties in his Review into the Australian Taxation Office’s administration of penalties.323

ATO materials

3.65 Legislation imposes GIC which is designed to encourage timely payment of tax as well as compensating the government for late payments. It also removes the advantage that late payers would have over those who pay on time.324

3.66 The rate of GIC (post July 2001) is the monthly average yield of 90 day bank accepted bills for a prescribed month, published by the Reserve Bank of Australia, plus an uplift factor of 7 percentage points which compounds on a daily basis. The uplift factor is intended to dissuade taxpayers from using tax debts as a source of finance. It should be noted that the payment of GIC is a deduction in the year in which it is incurred and conversely interest remitted is assessable income.325

3.67 Section 8AAG of the TAA 1953 provides the Commissioner with discretion to remit interest in relation to late payments where the ATO is satisfied that either of the following apply:

  • where the delay in payment was caused by circumstances not attributable to the taxpayer and the taxpayer had taken reasonable action to mitigate those circumstances;
  • where the delay in payment was caused by circumstances attributable to the taxpayer and the taxpayer had taken reasonable action to mitigate those circumstances, it would be fair and reasonable to remit all or part of the interest having regard to the nature of the circumstances; or
  • there are special circumstances because of which it would be fair and reasonable to remit all or a part of the charge or it is otherwise appropriate to do so.

3.68 Whether remission is to be granted also depends on the risk the ATO attributes to the case, for example, smaller amounts and where the taxpayer has a good compliance history are generally remitted.326 Partial remission may be considered where taxpayers would not qualify for full remission, for example, in a case where taxpayers were not always compliant or where the taxpayers contributed to the circumstances which resulted in late payment.327

3.69 Circumstances, where the ATO does not attribute the cause of the late payment to the taxpayer, include natural disasters, industrial action, unforeseen collapse of a major debtor or the sudden ill health of the taxpayer. Remission may also be considered where a taxpayer demonstrates that plans were in place to ensure the payment of tax on time, but that as a result of the unforeseen circumstances, payment on time was not possible. General statements such as adverse business conditions affecting an industry or general economic downturn are not acceptable.328

3.70 Where payment delays are attributable to the taxpayer, the ATO will take into account the following factors:

  • the intention of GIC to encourage timely payment, discourage the use of tax as finance and compensate the government for the delay in payment; and
  • remission must be fair to the taxpayer having regard to the nature of specific events and also fair to the community, for example, the taxpayer should not be given any advantage over others who pay on time.329

3.71 Accordingly, the ATO will consider whether it is fair and reasonable to remit interest from the perspective of ordinary reasonable community members who pay their taxes on time. For example, whether partial or full remission of interest would avoid serious hardship.330

3.72 The ‘otherwise appropriate’ discretion gives the ATO flexibility in relation to remitting interest, such as responding to changing circumstances, considering unusual factors or future issues. Such considerations may be in relation to a particular taxpayer but in practice it is more likely to concern a particular group of taxpayers, such as the ATO’s 2004 small business initiative whereby such businesses with debts under $25,000 could enter into extended payment arrangements and could also be eligible for full or partial remission of interest for the period of payment depending on their particular circumstances.331

3.73 Practice Statement PS LA 2011/12 also describes specific situations where it may be fair and reasonable to remit interest. For example, where a taxpayer has entered into a 50/50 arrangement in relation to disputed debts, where litigation is funded under the ATO’s test case litigation program and in insolvency where all other creditors agree to forgo their claims to interest.332

3.74 Generally, a taxpayer must request remission of interest and demonstrate that remission is warranted. However, where the circumstances which justify remission are readily apparent, the ATO may initiate remission.333 The ATO has also advised that the decision to remit GIC is based on circumstances at the time of the decision and is not subject to a later reversal of that decision. Overall, the Commissioner does not impose conditions when remitting or considering remission of GIC.334

3.75 The ATO has also advised that there are automated processes which remit GIC on some amounts which are below the remission threshold. For manual processes, the ATO limits the amounts DBL officers are authorised to remit which are outlined in the table below.335

Table 3.3: ATO staff authorisations for remitting interest
Officer level APS1 APS2 APS3 APS4 APS5 APS6 EL1 EL2 SES
General remission
Max. amount $5K $10K $25K $75K $100K $250K
Remission otherwise appropriate
Max. amount Yes Yes
Remission otherwise appropriate: small business initiative
Max. amount Yes Yes Yes Yes Yes Yes Yes

Source: ATO, ‘Tax authorisation guidelines’ (Internal ATO document, November 2014).

IGT observations

3.76 As mentioned earlier, there may be situations where taxpayers, despite their best intentions, enter into unaffordable payment arrangements. In such circumstances, GIC may have escalated to an extent where the debt becomes unmanageable. Remission of GIC in part or whole, in such cases, may have been enough to maintain their previous willingness to engage with the ATO. For example, the IGT agrees with stakeholders that the ATO could better encourage earlier payment by stating on its payment reminders that partial remission may be considered where payment is received within a certain timeframe.

3.77 As mentioned in Chapter 2, the ATO has recognised that there may be a ‘tipping point’ for the effectiveness of the GIC and is currently conducting research and is analysing the ‘next best action’ approach to encourage particular taxpayers to pay their debts including by remitting interest. The outcomes of this work could be used to identify factors which result in timely payment when interest is remitted as opposed to allowing a debt to continue with GIC accruing. Such an approach could also minimise the extent of serious financial hardship or insolvency.

3.78 The IGT observes that the ATO’s materials are silent as to whether, firstly, it can impose conditions on interest remission and, secondly, whether it can overturn remission decisions where those conditions are not satisfied. However, the ATO has advised that it does impose conditions on remission of GIC. Accordingly, the issue may more likely be attributable to the need for better supervision of ATO officer decisions which will be discussed in Chapter 4.

Recommendation 3.3

The IGT recommends the ATO:

  1. engage with taxpayers in discussions on remission of interest as a means of supporting prompt payment of debt by, for example, including on payment reminders that partial remission may be granted where debts are paid promptly; and
  2. based on the findings of its research into ‘tipping points’ and the ‘next best action’ consider remitting interest in appropriate cases to further encourage prompt payment.

ATO response: Matter for Government

284 ATO, ‘General Debt Collection Powers and Principles’ above n 48, paras [52]-[54].

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

286 ATO, ‘General Debt Collection Powers and Principles’ above n 48, para [56].

287 Ibid, para [63].

288 Ibid, paras [59], [63].

289 ATO, ‘BVAT Parameters’ above n 158; ATO, ‘DRN Company Matrix’, above n 53.

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

291 Ibid.

292 ATO, Communication to the IGT, 1 April 2015.

293 ATO, ‘General Debt Collection Powers and Principles’ above n 48, paras [63]-[64].

294 ATO, Communication to the IGT, 12 December 2014; ATO, Communication to the IGT, 21 January 2015.

295 ATO, ‘Standard Training Schedule - Early Collections’ (Internal ATO document, July 2014), ATO, ‘Standard Training Schedule – Firmer Action’, above n 160, ATO, ‘Standard Training Schedule - Strategic Recovery, Superannuation, Large & Consolidated (SRS)’ (Internal ATO document, July 2014), ATO, ‘Learning and Development – Toolkit’ (Internal ATO document, undated), ATO, ‘Debt Skill Set – Work Activities’, above n 160; ATO, ‘Payment Arrangements – Overview Learner Workbook’ (Internal ATO document, July 2012).

296 ATO, Communication to the IGT, 28 April 2015.

297 ATO, Communication to the IGT, 2 March 2015; ATO, Communication to the IGT, 1 April 2015.

298 ATO, Communication to the IGT, 1 April 2015.

299 An External Report.

300 Ibid.

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

302 Ibid.

303 ATO, Communication to the IGT, 19 November 2014; ATO, Communication to the IGT, 9 December 2014; ATO, ‘Debt Skill Set Model’ (Internal ATO document, undated).

304 An External Report.

305 Ibid.

306 Taxation Administration Act 1953 sch 1 ss 340-5, 340-10.

307 Rollo v Morro (1992) 23 ATR 447; Corlette v. Mackenzie 96 ATC 4502; (1996) 32 ATR 667.

308 ATO, Debt Relief, PS LA 2011/17, 3 July 2014, paras [24]-[25].

309 Ibid, paras [29]-[31], ATO, ‘Debt Business Line: Hardship Referral Fact Sheet’ (Internal ATO document, 2011).

310 ATO, ‘Debt Relief’, above n 308, paras [32]-[36].

311 Ibid, paras [37]-[38].

312 Ibid, paras [39]-[40].

313 ATO, Communication to the IGT, 18 November 2014; ATO, Communication to the IGT, 12 December 2014; ATO, ‘Release - Prepare a Recommendation’ (Internal ATO document, March 2014).

314 ATO, Communication to the IGT, 1 April 2015.

315 ATO, ‘Process Improvements 2013/14’ (Internal ATO document, undated).

316 ATO, Communication to the IGT, 3 March 2015.

317 PWC, 2012 Release Review: Overarching Report (2012); PWC, 2013 Release Review: Overarching Report (2013); PWC, 2014 Release Review: Overarching Report (2014).

318 ATO, ‘Debt Relief’, above n 308, paras [38].

319 Rasmussen v Commissioner of Taxation 2013 ATC 10-337.

320 [2014] AATA 823.

321 These statistics have not been reconciled by the ATO.

322 [2014] AATA 823.

323 IGT, ‘Penalties review’, above n 120, pp 12-15, 34-35, 40-41, 58, 78, 88 92.

324 ATO, Administration of General Interest Charge (GIC) Imposed for Late Payment or Under Estimation of Liability, PS LA 2011/12, 19 December 2013, paras [25]-[26].

325 Ibid, paras [4], [12]-[15].

326 ATO, ‘Debt Risk Management’, above n 237, para [5]; ATO, ‘Debt - Low Value Activity Guidelines’ (Internal ATO document, October 2014).

327 ATO, ‘Administration of GIC’ above n 324, para [34].

328 Ibid, paras [35], [36], [39].

329 Ibid, para [43].

330 Ibid, paras [44]-[46].

331 Ibid, paras [51]-[53], [55].

332 Ibid, paras [51]-[53], [55].

333 Ibid, para [28].

334 ATO, Communication to the IGT, 5 March 2015.

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