The Inspector-General of Taxation's (IGT) Debt Collection review was prompted by concerns raised by individuals, small businesses, tax and insolvency practitioners as well as their representative bodies. Broadly, these concerns related to the Australian Taxation Office's (ATO) ability to recover tax debts effectively whilst ensuring that its actions were proportionate to circumstances of the affected taxpayers.
The continual growth in collectable tax debt over the last decade to more than $20 billion in 2013–14 and its potential impact on government services were also important considerations in undertaking this review. The ATO has acknowledged that its previous approach to debt collection was 'random and ad hoc' and had not reduced its overall growth. Such an approach involved a linear process for debt recovery which generally relied upon a series of escalated actions. Prior to the commencement of this review, the ATO had begun developing a program of work to explore alternatives and improve its recovery action.
Furthermore, it is not uncommon for the ATO to initiate additional remedial programs in anticipation of IGT reviews. The IGT supports such action where improvements are realised more quickly for the tax system and stakeholders alike. In these circumstances, the IGT takes a cooperative approach to assist the ATO in improving its strategic focus and achieve optimal outcomes.
Given that the ATO's new program of work will take some time to be fully implemented and bear fruit, the IGT has made a number of recommendations as interim measures. One of these measures proposes a focus on the main debt holdings which are owed by individuals and micro businesses. These two taxpayer segments account for approximately 60 per cent ($12.3 billion) of total collectable tax debt. Related recommendations have also been made to identify underlying causes of cash flow and payment difficulties for these taxpayers and to develop preventative strategies. Another interim measure proposes that the ATO take more frequent and proportionate debt recovery action to minimise the necessity to take firmer action at a later time.
The IGT has also considered the ATO's developing projects or programs as well as its previous approaches. However, it is important to appreciate that, as key projects were at various stages of design, development and implementation, their effectiveness cannot be comprehensively assessed. The IGT has assessed these projects to the extent possible, has supported certain of their features and recommended enhancements with respect to others in order to reduce overall debt whilst ensuring recovery actions are proportionate and that taxpayers are treated fairly.
The ATO's new overarching strategic focus is to design actions that reduce overall debt holdings by using taxpayer behavioural analysis to prevent debts arising and, where they do arise, taking the most effective recovery action at the most appropriate time. This is consistent with recommendations made in previous IGT reviews where the use of behavioural analysis is a common theme. The IGT continues to endorse such an approach.
However, the IGT has identified a need to ensure ATO officers have the appropriate level of expertise and experience to handle taxpayer cases and fulfil procedural requirements. The ATO has a framework for officer decision authorisations and also provides training and support for various aspects of debt recovery. The decisions of officers, who are considered 'proficient', are not scrutinised in the majority of low risk debt cases. For example, a junior ATO officer considered proficient may garnish up to $50,000 from taxpayers' bank accounts. Given the sustained and substantial level of individual taxpayer complaints to the Ombudsman and the IGT over the last decade, particularly in relation to ATO garnishee actions, the IGT believes that there is a need for greater top-down supervision. Accordingly, the IGT has recommended a range of improvements, including expanded team leader approval requirements and training on commercial awareness, improved guidance and decision making support tools as well as better assurance of staff adherence to policies.
The broader impact of the ATO's debt recovery actions on other creditors was also considered by the IGT. Such impact may occur where taxpayers are either unable to pay their creditors or make delayed payments. The delayed or non-payment may, in turn, cause financial difficulties for their creditors. Indeed, a third-party survey reported that many small businesses have entered some form of insolvency administration. In another survey, over one-third of respondents had a supplier or customer who was unable to pay creating a domino effect of financial difficulty. Accordingly, the IGT is of the view that the ATO has a role to support the broader economy in terms of the impact of its action on third party creditors. In this respect, the IGT has recommended that the ATO should develop improved metrics to better assess its performance and the benefit to the economy.
In relation to the ATO's engagement of external debt collection agencies to assist with debt recovery, some stakeholders fundamentally opposed it. The IGT has recommended that the ATO better inform and educate the public by providing information on its use of external debt collection agencies both to assuage concerns and to make transparent the intended benefits and outcomes.
Overall, the IGT has made 19 recommendations to 16 of which the ATO has agreed, agreed in principle or agreed in part. The ATO has disagreed with 2 recommendations and considered that 1 recommendation was a matter for Government.
The IGT seeks the highest levels of transparency in reporting recommendations and the ATO responses. Whilst ATO's agreement with many of the recommendations is welcomed, the ATO's associated commentary, on this occasion, raises potential governance concerns as it creates substantial uncertainty with the scope of agreement and risks inadequate implementation of recommendations. Furthermore, elements of recommendations are not addressed or the ATO appears to be effectively disagreeing with them. For example, the ATO has agreed with Recommendation 4.8 which is aimed at improving staff supervision and decision making. However, the ATO's commentary appears to limit its agreement to pre-existing arrangements and does not address the part of the recommendation aimed at improving the supervision of junior staff who issue garnishee notices.
In relation to disagreed recommendations, the ATO has disagreed with Recommendations 4.5 and 4.7. The former seeks to make taxpayers aware of their right to request that the ATO exercises its discretion to not offset tax credits against debts at the outset of discussions. Recommendation 4.7 requires the ATO to consider merging the Debt Business Line into the Compliance Group. While the ATO has disagreed with it, the accompanying commentary confirms that consideration of the appropriate organisational structure will be undertaken through its 'Reinvention' program.
The ATO has disagreed in part with two recommendations. These are 3.1(b), relating to the development of streamlined viability and capacity to pay tools for use in lower risk cases, and 4.1(d) which proposes the adoption of a unified approach between debt and legal officers when issuing garnishee notices in disputed debt cases.
The ATO response to Recommendation 3.3 is that it is a matter for Government to consider as the ATO believes the legislative policy prevents it from remitting interest in appropriate cases to encourage prompt payment of debts.
It should be noted that the recommendations are an integrated package where each builds upon the other. As the ATO has disagreed or effectively disagreed with certain recommendations or aspects thereof, the full benefit of the intended integrated outcome may not be realised.
Given the importance of the management and collection of debts in the tax system, the IGT will maintain a watching brief over the effectiveness of the ATO's program of change. As future complaint cases may also surface issues, the IGT will appropriately explore and address these issues through discrete and targeted investigations.