1.1 This document provides a summary of the submissions and evidence obtained during the Inspector-General's review of the Australian Taxation Office's (ATO or Tax Office) small business debt collection policies and practices.
1.2 This document has the following objectives:
- to present the evidence received by the Inspector-General, in the form of written and oral submissions, as a contribution to ongoing public discussion of taxation debt collection issues; and
- to present the views expressed during the review, which were explicitly presented as guidance for future changes to the taxation debt collection system.
1.3 Subject to certain confidentiality provisions, the Inspector-General has discretion to make any submission available to the public generally. This would result in publicly identifying the person who made the submission. The Inspector General has not exercised this discretion because it was felt that this would promote an improved flow of information. However, where possible, the particular area of the private sector has been identified to assist readers' understanding. Although this approach may indicate a generalisation applying to all members of a sector, the intention is only to recount the views of those members of the sector that provided submissions.
1.4 On 21 April 2004, the Inspector-General announced the terms of reference for his review into the Tax Office's small business debt collection policies and practices. These were:
This review will investigate the fairness of the ATO's small business debt collection policies and practices. It will examine some of the perceptions and concerns raised by stakeholders in the course of the scoping review and prioritisation project. It will evaluate whether the ATO's small business debt collection policies and practices strike an appropriate balance between the competing underlying tensions of efficiently collecting tax debts and recognising the benefits of viable businesses' ongoing trading.
It will focus upon the following matters:
- to identify and determine whether the ATO small business debt collection policies adequately take into account the provision of assistance to small businesses who wish to meet their tax obligations without harming their underlying viability;
- to consider the manner in which the ATO implements its small business debt collection policies;
- to examine the impact of the ATO's small business debt collection policies and practices on aspects of small business tax debt collections, particularly:
- the impact of the ATO's current approach to payment arrangements in assisting small businesses get out of debt without unduly affecting the viability of the business;
- the ATO's management of debt collection cases, including their timeliness, co-ordination and commercial approach, with regard to the Taxpayers' Charter and the Compliance Model;
- whether the Commissioner's policies and practices unnecessarily force small businesses into either bankruptcy or liquidation;
- the consistency of the Commissioner's exercise of a release from tax debts based on serious financial hardship (Division 340 of Schedule 1 to the Taxation Administration Act 1953, previously section 265 of the Income Tax Assessment Act 1936) with the legislation's underlying policy; and
- the ATO's approach to the compromise of tax debts.
1.5 Consultation was conducted with a wide range of individuals and organisations on the Tax Office's small business debt collection policies and practices, and the broad context and approach has been documented in Appendix 2 of the Inspector-General's report, Review into the Tax Office's Small Business Debt Collection Policies and Practices – Report.
1.6 The following outlines the broader themes underlying the issues discussed in this document.
Themes underlying issues of concern
1.7 Consultations drew out many issues of concern that the private sector has with the Tax Office's debt collection policies and practices. Behind these issues of concern are broad themes of unease. These themes include:
- uncertainty about the debt collection process, including the perceived lack of clarity, practical guidance and certainty provided by the Tax Office's debt collection policies;
- disquiet about the way in which the Tax Office implements its debt collection policies and the impact of the Tax Office's management of debt collection cases including:
- the perceived failure by the Tax Office to understand the underlying causes of small business collectable tax debts;
- the perceived lack of consistency, certainty and transparency in the implementation of its debt collection policies;
- disquiet about a lack of commercial orientation in aspects of debt collection including the timeliness of response by the Tax Office and approach at creditors meetings;
- the perceived lack of co-ordination with other agencies;
- disquiet about the way in which the Tax Office exercises judgement in determining recovery action including:
- the perceived Tax Office's lack of appreciation of the pressures faced by small business and the perceived lack of consideration given to the impacts on businesses and their creditors when determining recovery action;
- the failure by the Tax Office to consider the underlying viability of a debtor business as part of its debt collection practices;
- the failure by the Tax Office to consider how its actions will affect the underlying viability of the debtor's creditors and competitors;
- the perceived lack of differentiation between large/small or high risk/low risk or compliant/non-compliant small businesses when determining recovery actions;
- the perceived reliance and inflexible adherence to processes and procedures rather than judgments designed to manage risks;
- apprehension with the Tax Office's approach to debt collection including:
- the perceived lack of transparency and accountability in the Tax Office's debt collection systems including the perceived reliance on automated processes and procedures; and
- the perceived lack of timely and clear communication over debt issues;
- apprehension about the capability of debt collection officers; and
- disquiet about a lack of timeliness and consistency in the Tax Office's approach to legal action with the debt collection policies not promoting a transparent and accountable process.
1.8 These broad themes underlie many of the issues discussed in this document.
Summary of views expressed
1.9 The Commissioner of Taxation signalled an increased auditing of the small business sector this financial year and, as a result, expects higher levels of tax liabilities to be raised in this sector. However, there are general concerns that the Tax Office has still not got the balance right in collecting debt from small businesses.
1.10 Media reports have generally claimed that the Tax Office is too quick to bankrupt or wind up businesses. Insolvency and some tax practitioners have generally claimed that the Tax Office is too lenient in collecting debt. However, representatives of small businesses have stated that they are happy with the Tax Office's flexibility when negotiating their own debt but perceive that they are being treated inequitably where the Tax Office offers the same flexibility to serial defaulters.
1.11 Additionally, representatives for small businesses generally claim that the Tax Office does not understand enough about the factors that impact on small business debt to deliver fair or proportionate debt collection responses in individual cases. The Tax Office generally claims that these criticisms are made by taxpayers who are the subject of legal action and the Tax Office cannot respond publicly to those criticisms because the taxation law secrecy provisions prohibit it from doing so.
1.12 Many submissions pointed to issues of effectiveness or efficiency of recovery actions. However, in the Inspector-General's view these issues are more appropriately considered by Tax Office management and other bodies. The focus for this review is the fairness of judgements exercised by the Tax Office in its debt collection policies and practices.
1.13 Specific views were raised in the course of the review. These views and the Tax Office's response are discussed in more detail in following chapters. The Inspector-General has not undertaken a comprehensive analysis of the views and therefore does not evaluate or draw any conclusions from them.
Structure of document
1.14 Issues and views expressed during the review have been arranged in the remaining chapters to correspond generally to the terms of reference for this review.
1.15 Chapters 2 to 4 provide general background information. Chapters 5 and 6 outline the views expressed on the Tax Office's small business debt collection policies and practices generally. Chapters 7 to 10 outline the views expressed on particular debt collection practices. The views expressed were sometimes contradictory in nature.
1.16 Chapter 2 provides the context for the review by defining terms, examining the proportion and make-up of the small business sector's collectable debt and outlining the general environment in which small businesses operate.
1.17 Chapter 3 gives an overview of the Tax Office's debt collection system.
1.18 Chapter 4 provides detail on the Tax Office's processes for managing collectable debt. It outlines the processes in a chronological order from before a debt becomes due and payable through to the possible bankruptcy or liquidation of a taxpayer.
1.19 Chapter 5 outlines the views expressed on the Tax Office's main debt collection policy document, the ATO receivables policy.
1.20 Chapter 6 outlines the views expressed on the Tax Office's small business debt collection practices generally. These views overlap to some extent with those expressed in the later chapters.
1.21 The remaining chapters outline the views expressed on specific aspects of the Tax Office's small business debt collection practices. Chapter 7, 8, 9, and 10 outline the views on payment arrangements, legal action to recover tax debts, compromise of tax debts and release from tax liabilities, respectively. Chapter 7 also discusses the 'small business debt initiative' announced by the Tax Office.