7.1 This chapter considers the ATO's processes and timeliness in collecting unpaid SGC. The ATO's failure or inability to collect unpaid SGC will have a direct impact on taxpayers' retirement benefits. The underlying policy behind SG is to ensure that as many Australian employees as possible have access to superannuation for their retirement. It is therefore important that the ATO's administration of SG optimises voluntary compliance as well as the detection and collection of unpaid SGC to the benefit of taxpayers.
7.2 Ultimately, raised SGC liabilities that the ATO is unable to recover represent lost retirement income for Australian employees, who in many instances represent those that are most reliant upon SG for retirement support. It also increases the financial burden on future governments in having to make larger outlays for age pension payments.
7.3 As part of the 2007-08 Commonwealth Budget the ATO received an additional $125.7 million over four years to reduce the existing stock of taxation debt and outstanding SGC payments owed by employers. The budget papers state that the enhanced debt recovery will ensure that the level of collectable taxation debt is manageable over the longer term and is expected to result in additional revenue collection of $140 million over four years.
ATO SGC debt recovery function
7.4 All SG compliance activities are managed through the ATO's Siebel case management system. Once a SGC assessment is raised (either through the ATO issuing a default assessment or the employer lodging a SGC Statement) then the SGC debt is recorded on a separate SG accounting system.
7.5 Following the issuing of an SGC assessment to the employer, a letter is also sent to the employee informing them of the outcome of the ATO's investigation. The case is then closed on the Siebel case management system. As part of finalising the investigation, SG auditors do not actively seek to promote payment of the outstanding SGC debt such as having employers enter into a payment arrangement.
7.6 The ATO advises that auditors, at the commencement of compliance action, do actively encourage employers to pay any shortfalls immediately or as soon as possible and even offer to send them payment slips, if requested. In addition, the standard letter issued upon the finalisation of an audit sets out the penalties associated with the non payment of SGC. However, the ATO is currently reviewing its processes surrounding the negotiation of payment arrangements by SG auditors to determine if they can be aligned to similar payment arrangements entered into by other compliance areas.
7.7 If a SGC debt remains unpaid for more than 28 days beyond the due date, then a case is created in the ATO's Receivables Management System, its debt collection case management system. The ATO's SGC debt recovery action is handled within the Operations area, separate from the SG compliance area.
7.8 Where the SGC debt is below a certain threshold then it may be referred to the ATO's external debt referral mercantile agents for collection. All other SGC debts are risk assessed and actioned in accordance with the ATO's SGC debt collection strategy. Key elements of this strategy involve:
- Where employers are having difficulty paying their SGC debt, then the ATO will work with them to find a payment solution that fits their individual circumstances to ensure that viable businesses are not forced into liquidation.
- Early intervention for employers with new SGC debt, including pre-emptive action at the time of issuing the SGC assessment, the use of reminder and demand letters and the greater use of dialler technology.
- Preferred use of payment arrangements as the most efficient and cost effective way to recover SGC debt for both the employer and the ATO.
- Firmer action on employers who continually fail to meet their obligations, those who continually default on agreed payment arrangements or who do not have the capacity to pay. Firmer action includes negotiation, garnishee action, the use of tax credits to offset SGC debt, the issuing of notices of intended legal action and the issuing of creditor's statutory demands under the corporations law. The ATO remains willing to negotiate with taxpayers even after the commencement of legal or firmer action.
- Referral to legal action including the issuing of summons, bankruptcy action and liquidation proceedings.
7.9 The ATO advises that it also has specific debt collection approaches for higher levels of SGC debt including the use of campaigns and case ownership of debt cases.
7.10 Throughout the debt collection process, write-off may be identified as the most appropriate and cost effective course of action. A SGC debt may be written-off where it is either irrecoverable at law or uneconomical to pursue. Irrecoverable debts mainly relate to circumstances associated with insolvency. On the other hand, a debt may be treated as uneconomical to pursue if:
- it is probable that the total cost of recovery action will exceed the return to the Commonwealth; or
- the taxpayer has no assets or funds and there is little chance of their financial circumstances improving.
7.11 The ATO states that the decision not to pursue a SGC debt on the grounds of being uneconomical to pursue is governed by an assessment of the impact upon employees on whose behalf the SGC is owed. The ATO indicates that this approach will often result in the pursuit of a debt where the cost of recovery may exceed the amount of SGC owed as it is mindful of its role in protecting retirement incomes and the broader effect on voluntary compliance.
7.12 The ATO also advises that work is underway to improve its SGC debt collection processes including:
- Reviewing case selection for early intervention using dialler technology and referral to external debt collection mercantile agents.
- Decreasing the average handling time of cases and increasing legal action.
- Collaboration between the Debt and Superannuation business lines to better identify assessments arising from audit activity and implement a differentiated strategy from voluntary assessments.
- Developing a more sophisticated forecast tool to identify high risk employers, including taking into account the impacts of insolvency and associated PAYG debts.
ATO SGC debt collection results
7.13 Table 7.1 sets out the liabilities and collections in relation to SG compliance from 1998-99 to 2008-09, with Figure 7.1 providing a diagrammatic representation of these results.
Note: SGC raised refers to liabilities raised in a particular income year. SGC collected refers to superannuation guarantee charge collected in an income year and may include liabilities raised in previous income years. Both SGC raised and SGC collected reported include voluntary disclosures. SGC collections would include SG shortfall amounts, nominal interest, the administrative component, Part 7 penalty amounts and GIC, where the SGC was not paid by the due date.
7.14 The IGT notes that SGC raised increased substantially from 1998-99 to 2003-04, with a levelling-off from 2003-04 onwards.
Figure 7.1: Liabilities and collections in relation to SGC
Note: In 1994-95 SGC raised totalled approximately $20 million, rising to $40 million in 1995-96 and approximately $60 million in 1996-97 and 1997-98.
7.15 Figure 7.2 illustrates the accumulated amount of uncollected SGC at the end of each of the last eleven years. The IGT notes that accumulated uncollected SGC has increased substantially from 2000-01 while SGC collections have remained fairly steady (and in fact have dropped in 2008-09). The IGT found that uncollected SGC has accumulated to $936.1 million (the difference between SGC raised and SGC collected).
Figure 7.2: Accumulated uncollected SGC
7.16 Figure 7.3 sets out the accumulated amount of uncollected SGC debt as a proportion of SGC collections. It is evident that from 1998-99 onwards there has been an upward trend, with SGC debt accumulating faster than SGC collections.
7.17 Figure 7.3 also illustrates SGC collections as a proportion of SGC raised. The IGT considers that the continuing decline suggests that SGC collections, while also increasing over this period of time, have not kept pace with the increase in SGC raised. This has led to the escalation in SGC collectable debt.
Figure 7.3: Accumulated uncollected SGC debt as a proportion of SGC collections and SGC collections as a proportion of SGC raised
7.18 Table 7.2 sets out the ATO's SGC collectable debt position. The ATO reports that in 2008-09 it achieved an 18 per cent reduction in SGC collectable debt and a 20 per cent reduction in SGC collectable cases. The ATO finalised 15,131 debt cases while 12,490 new SGC debt cases were referred to the ATO's receivables management system for debt collection action.
|SGC collectable debt ($m)||237.3||287.3||325||281.53||231.4|
|% change from previous year||Up 52.8%||Up 21.1||Up 13.1%||Down 13.4%||Down 17.8%|
|SGC collectable debt cases||20,809||25,315||22,958||12,898||10,281|
|% change from previous year||Up 26.6%||Up 21.7%||Down 9.3%||Down 43.8%||Down 20.3%|
7.19 In addition to the $231.4 million in SGC collectable debt, the ATO advised that there was $36.4 million (327 cases) in disputed SGC debt (subject to objection or litigation) and a further $143.2 million (2,463 cases) relating to insolvent employers. A total of $67.5 million was barred from legal action as it was attributable to the late payment offset.
7.20 The ATO advises that approximately 7 per cent of SGC debt cases raised in 2008-09 were for debts exceeding $50,000. The combined value of this debt comprised about half of the total SGC debt raised for that income year. Nearly 40 per cent of all SGC debts cases were for amounts less than $2,500 and the total SGC debt owed by this population comprised approximately 2 per cent of the total SGC debt raised for 2008-09.
7.21 Table 7.3 provides further detail on SGC collectable debt cases by market segment as at 30 June 2009.
|Market segment||Number of cases||Value ($m)|
|Small to medium enterprises||962||69.39|
|Not for profit organisations||167||5.4|
7.22 Table 7.4 provides a break-up of SGC collectable debt into each of the debt levels as at 30 June 2009.
|Debt level||$m||Number of cases||Average debt/case|
Age of collectable debt
7.23 The ATO advises that in 2008-09 it has reduced the number of aged SGC collectable debt cases (defined as debt cases greater than two years old) by 55 per cent and a corresponding 41 per cent reduction in debt relating to these aged cases. Table 7.5 provides an age profile of SGC collectable debt across 2007-08 and 2008-09.
Note: The ATO is not able to provide a breakdown of the amounts written off by the year to which the liabilities relate. Consequently, the period indicates the time that the debt was written off, not the period to which the liabilities written off relate.
7.25 The ATO advises that approximately 50 per cent of SGC write-off cases are irrecoverable at law although they account for 75 per cent of the total SGC write-off value, with the remaining 50 per cent of cases being uneconomical to pursue and account for 25 per cent of the total SGC write-off value. The ATO also believes that the value and proportion of SGC write-off is inflated (as compared to income tax and activity statement debts) due to progressively clearing the backlog of SGC write-off cases and the additional funding that has allowed it to action older and smaller cases.
IGT observations and findings
7.26 The ATO's reported current debt holdings ($478.5 million) are significantly lower than the accumulated uncollected SGC amount ($936.1 million) over the eleven year period. This suggests that approximately $457.6 million of SGC debt has been written off during this period (difference between accumulated uncollected SGC and current SGC debt holdings).
7.27 Together with the current $143.2 million relating to insolvent employers, the IGT found that $600.8 million in SGC raised by the ATO has not been recovered, with most of this debt having been written-off and representing known lost employee retirement savings.
7.28 The IGT considers that the current level of SGC collectable debt, and its reduction since 2006-07 by approximately $94 million (including the reduction of SGC collectable debt cases by 12,677 cases), has been significantly influenced by the uncollected SGC that has been written off over the last three years.
7.29 The ATO advises that a significant component of SGC collectable debt is recorded for businesses that are already in severe financial difficulty (and in some cases insolvent). This means the cost to pursue and collection rate is considerably less favourable than for other business taxes where businesses' capacity and propensity to pay down their debts is more positive.
7.30 The $94 million reduction of SGC collectable debt also includes late payment offset claims totalling around $70 million.
7.31 The IGT notes that SGC debt will be more difficult to collect than other debts (such as income tax and activity statement) given that a large proportion of SGC raised, approximately 73 per cent in 2008-09, arises from audit activity rather than voluntary statements.
7.32 As part of the field work, IGT staff examined 120 SGC debt recovery cases that had an associated EN complaint finalised in the 2007-08 income year. The results of the fieldwork analysis are presented in Table 7.8.
|Payment received — no debt action||10||0||Late Payment Offset lodged||3||0.25|
|Early collection action||9||0.18||Dispute||5||0.13|
|Payment arrangement||13||1.89||Insolvent employer/bankruptcy||34||1.3|
|Notice of Intended Legal Action issued||4||0.41||Finalised — payment received||36||0|
7.33 Across these 120 employers, the ATO raised a total of $10.38 million in SGC and issued 1001 assessments, 610 of which were default assessments raising $6.8 million while 397 were categorised as voluntary raising $3.6 million.13
7.34 The IGT found that approximately 30 per cent of the debt recovery cases examined led to the non-recovery of the SGC debt either because the employer was insolvent or it was uneconomical to pursue the debt. In a further 30 per cent of cases the employer had paid the SGC debt as a result of ATO debt recovery action. Across the 120 cases, most of the SGC collectable debt is associated with payment arrangements and likely insolvent or bankrupt employers.
7.35 Table 7.9 provides a break-up of the number of default and voluntary assessments where the SGC liability remains outstanding, has been paid or has been written-off.
|Outcome||Assessment type||Number of assessments||Amount ($m)|
|SGC debt paid||Default||229||2.03|
|SGC debt partially paid||Default||20||0.13|
|SGC not paid||Default||220||2.5|
|SGC debt write-off||Default||135||2.13|
7.36 The IGT found that where a default assessment is raised, then it is twice more likely that a SGC debt will be outstanding one year after the issue date than where an employer lodges a SGC Statement during an audit.
7.37 In addition, the IGT found that where a default assessment is raised, then it is six times more likely that a SGC debt will be written-off than where an employer lodges a SGC Statement during an audit.
7.38 The IGT found that the ATO's debt collection processes do not adequately take into account the employers compliance behaviour in terms of how cases are actioned.
7.39 Default assessments by their very nature indicate that the employer has not engaged with the ATO or carried out their obligations under the SGAA. These employers generally reflect a low compliance attitude and as a result would tend to have debts outstanding for a longer period of time. There is a greater likelihood when default assessments are issued that the employer also has other debts outstanding, has not attempted to get their affairs up to date, may not even be operating any further and may already be in the process of insolvency proceedings. This situation contrasts with voluntary lodged statements where the employers are attempting to work with the ATO and engaging in a positive manner to rectify and make good amounts due.
7.40 By comparison, employers that voluntarily lodge assessments understand they have been deficient in keeping up to date with their affairs and are engaging with the ATO in getting their affairs into order and negotiating payment.
7.41 The ATO's end-to-end review also found that employers that voluntarily lodged SGC Statements (either after prompted by auditors during an investigation or unprompted disclosures) are more likely to pay their SGC debt than employers that were issued with a default assessment. This was supported by the observation of debt collection staff that it is more difficult to engage and recover debt from 'default' employers.
7.42 The ATO's review recommended that the SGC Debt area should be provided with details on whether the SGC debt is derived from employers that voluntarily lodged SGC Statements or default assessments.
7.43 The IGT supports this recommendation and believes that this detailed information would allow the ATO to develop better strategies for collecting SGC debt. For instance, the issuing of a default assessment indicates that an employer has not been cooperative during the audit (given the ATO's approach of seeking to encourage voluntary disclosure). When such a case proceeds to debt collection then the ATO should respond with firmer action much sooner than it currently does.
7.44 A more detailed analysis of the 'SGC not paid' category indicates that of the 340 outstanding assessments (with SG liabilities of $3.73 million) a total of 95 assessments (with SGC liabilities of $1.24 million) were classified as insolvency, bankruptcy or non-pursuit cases. Nearly all of these assessments were issued as default assessments.
7.45 The ATO is aware of the relatively high risk associated with default assessments and is modifying its collection strategies in relation to those employers who have been issued with a default assessment.
Protection of SG entitlements
7.46 ASFA observed that although the compulsory superannuation system is a vital pillar to Australia's retirement income policy, employee's superannuation entitlements are not guaranteed. It suggested that the General Employee Entitlements and Redundancy Scheme (GEERS) should be expanded to also cover unpaid employer superannuation contributions, which are currently specifically excluded.
7.47 The IGT supports the expansion of GEERS to cover unpaid employer superannuation contributions. The review findings confirm that the employees missing out when employers become bankrupt or insolvent are those that are the most reliant on compulsory superannuation for retirement support.
7.48 An expansion of GEERS to cover unpaid SGC will also allow government to quantify higher future age pension outlays and act as a driver for improvements in the SG system to minimise employers defaulting on their SG obligations.
7.49 While the current legislation affords SGC debt a priority status in insolvency it does not provide the ATO with additional collection powers. The IGT supports the expansion of the director penalty notice provisions to cover unpaid SGC. If a company fails owing superannuation to employees, then the directors of the company should be made strictly liable for the unpaid superannuation liabilities of the company. This will act as a strong deterrent against employers not paying superannuation and also discourage phoenix practices. It will also enhance the ATO's ability to recover SGC debt on behalf of employees by allowing it to recover SGC even after a company has been wound up.
7.50 The IGT believes that expansion of the director penalty notice provisions and GEERS to cover SGC are complimentary. Where a company has not met their SG obligations then the ATO should have the ability to recover unpaid SGC amounts against the directors of the company personally. Only when the ATO has not been able to recover unpaid SGC from the company and directors should GEERS cover unpaid employer superannuation contributions.
To better protect employees' SG entitlements and improve both deterrence against SG non-compliance and provide greater transparency of the cost of SG non-compliance on future age pension outlays, the Government consider:
- Expanding the director penalty regime to apply to unpaid SGC liabilities of the company; and
- Expanding GEERS to cover unpaid SGC liabilities where a company has been placed into liquidation and the ATO has not been able to recover against the directors personally.
This is a policy matter for Government's consideration.
ATO SGC collection actions
7.51 The ATO advises that all SGC debt is characterised as high risk and accordingly receives priority debt collection action in that firmer debt collection action and legal action is taken on cases of comparatively small value.
7.52 Employees and the joint ACTU, ISN, IFCC and AIST submission raised a number of concerns with the ATO's debt collection actions and possible suggestions. Some believed that the ATO does not have the resources to undertake thorough SGC debt collection activities and to take additional action to recover SGC debts.
7.53 It has been suggested that letters to employers with significant and accruing tax debts demanding payment should also require employers to provide proof that SG contributions in respect of employees have been made and request lodgement of SGC Statements. For example, before the ATO enters into a payment arrangement with employers, it should ask for proof that SG contributions are being made and ask for SGC Statements to be lodged.
7.54 Employees that have lost their superannuation entitlements have asserted that the ATO is not following up with liquidators by lodging proofs of debt in relation to unpaid SGC — rather it is asking that employees do so and is asking employees to contact liquidator even though employees have no standing. The IFCC also submitted that in insolvency cases it was rare for the ATO to lodge a formal proof of debt and appears to leave the pursuit of unpaid superannuation to the superannuation funds, the employees themselves or insolvency practitioners.
7.55 The view was also expressed that the ATO is not taking any legal action for insolvent trading or for breaches of director duties where companies go into liquidation with significant tax and SGC debts.
7.56 The ATO advises that once an employer becomes insolvent, (liquidator/administrator/trustee appointed), responsibility for collection of unpaid SGC transfers to the insolvency practitioner. However, ATO procedures require the lodgement of a Proof of Debt in all cases involving an SGC debt.
7.57 The ATO then directs enquiries from employees and super funds to the insolvency practitioner for the most up to date information as to whether funds are, or may become, available for payment of the unpaid SGC debt.
ATO SGC collection results
7.58 Payment arrangements are the most common debt collection method utilised by the ATO in seeking to recover outstanding SGC, with an active payment arrangement in place for 26 per cent of all SGC collectable debt cases as at 30 June 2009.
7.59 Table 7.10 sets out more detailed information on the number of payment arrangements granted and defaulted.
|Payment arrangements granted|
|Number of cases||16,996||11,436|
|Payment arrangements defaulted|
|Number of cases||7,037||5,991|
7.60 In 2008-09 the ATO granted 11,436 payment arrangements with a value of $251.83 million.14 In 2007-08 the ATO granted 16,996 payment arrangements with a value of.
7.61 Table 7.11 outlines the firmer and legal actions taken by the ATO in 2007-08 and 2008-09.
|Statutory demand (section 459E)||683||819|
IGT observations and findings
7.62 In many instances, ATO staff handles the debt collection process well — they listen and take into account the employer's individual circumstances, they properly emphasise the priority of SGC debt over other tax debts in discussions and negotiations with employers and the ATO successfully recovers SGC.
7.63 However, the IGT observed that certain ATO debt collection approaches and practices, together with those identified by stakeholders in submissions and consultations, may have a detrimental impact on the efficiency and effectiveness of the ATO's debt collection strategy in relation to SGC debt. These approaches and practices include the following:
- Debt collection cases are not allocated to a specific tax officer, but rather a number of officers may be involved at different stages in the debt collection process. After an employer enters into a payment arrangement then the case will go back into the pool of debt collection cases. If the employer defaults, then the case will be reallocated to another tax officer. In some debt collection cases examined by the IGT as many as seven tax officers were allocated throughout the debt collection process.
- Due to the long timeframes from the time that SG shortfalls arise to when the ATO begins debt collection action (often more than three years apart), the ATO's task of recovering unpaid SGC is made more difficult. The ATO has limited avenues to take firmer action without initiating bankruptcy or wind-up proceedings and quite often tracing for garnishee purposes produces no results.
- There are definite resource limitations on the ATO in being able to take firmer action and initiate legal action.
- In many defaulted payment arrangements there is often little examination of the employer's financial and compliance position before entering into further payment arrangements.
- The end result is that high risk SGC debt cases (such as uncooperative employers and defaulted payment arrangements) that are not selected for legal action tend to undergo 'churning' — that is, they are allocated and reallocated to multiple tax officers each taking similar debt collection actions such as issuing a notice of intended legal action and having the employer enter into a payment arrangement which is subsequently defaulted. In some cases examined by the IGT, an employer was issued with five notices of intended legal action over a 14 month period while other employers entered into six payment arrangements, all of which were defaulted.
7.64 It is important that the ATO's SGC debt collection approaches promote a level-playing field. As noted in the IGT's small business debt report, these approaches need to appropriately distinguish those employers that want to comply with their payment obligations but need short-term assistance to do so and those that are either incapable of meeting tax payment obligations within a relatively short time frame or are in serial default.
7.65 The distinct nature of SGC debt means that the ATO's approaches must also take into account that it is seeking to recover unpaid superannuation entitlements on behalf of employees. It acts in a 'trustee-like' capacity, given that employees have very limited powers to recover unpaid SGC. This means that employees are reliant on the ATO acting in their best interest and ensuring that the ATO's debt collection approaches and practices maximise the recovery of unpaid SGC.
7.66 New SGC debt cases should be risk-assessed not only on the basis of debt levels but also on the employer's previous compliance behaviours. For instance, the issuing of a default assessment at the audit stage should be a factor in initiating firmer action sooner. Likewise, an employer's current compliance with their SG obligations (that is, whether they have they paid all other superannuation on time or have lodged SGC Statements) and other lodgement and payment requirements are also relevant considerations in building an employer risk profile.
7.67 The ATO advises that it is adopting a number of key early intervention strategies including:
- Closer collaboration between the Debt and Superannuation business lines to improve the ATO's ability to identify and take appropriate action on high risk cases as early as possible.
- Issuing letters 28 days after the debt case has been created — where a letter would not be suitable, the first debt collection action will be an outbound call or referral to an external collection agency. The 28 day period is to allow for delays in the taxpayer receiving their SGC assessment notices.
- Outbound calls to taxpayers who do not respond to our letters, in as little as seven days after the letter has been issued in the case of larger debts.
7.68 The ATO believes that some of the operational improvements being made will address the problem of 'churning' and ensure defaulted arrangement cases are better managed. Trials are also being conducted in differentiating between voluntary lodged and audit raised (default) assessments for specific treatment action.
To minimise SGC debt defaulters, the ATO should improve its risk identification techniques to better target high-risk employers with firmer action sooner. For instance, the ATO's debt collection processes should place greater emphasis on employers' previous compliance behaviour in determining how a debt case is actioned.
Where an employer has defaulted in their payment arrangement, the ATO should require further information regarding the employer's financial and compliance position before entering into further payment arrangements.
We have already implemented most parts of this recommendation. Recent changes to superannuation debt collection activities include:
- reducing the average handling time of cases;
- ensuring staff place a greater emphasis on the compliance history of the employer;
- referring debt for legal action in a timelier manner; and
- obtaining additional financial information (not previously recorded) in default arrangement cases.
We are currently exploring options to further improve our case risk assessment and differentiated approach to SGC debt collection.
13 The assessments issued may not necessarily directly relate to an EN complaint investigation.
14 The ATO notes that there could be more than one payment arrangement granted for an entity in any period and across periods.