3.1 This chapter gives an overview of the Tax Office's debt collection system.
Tax Office's role in the system
3.2 The Tax Office is the main Commonwealth revenue collection agency. It collects over 90 per cent of the Government's revenue. Its principal role is to administer the taxation, superannuation and excise laws and address those broader issues affecting the revenue system.
3.3 The Tax Office finalised approximately 1.6 million debt cases—including debt cases not attributable to small businesses—for the 2002-03 income year.
3.4 The Tax Office states that it is an organisation that must operate unlike other debt recovery organisations. Firstly, it states that it is not a typical creditor and secondly, it has obligations that require it to depart from operating on a purely commercial basis.
Tax Office is not a typical creditor
3.5 Unlike other creditors, the Tax Office cannot choose not to deal with non-compliant debtors nor can it refuse to provide supplies to these debtors until they resolve their existing debts. This means that the Tax Office's debt collection policies and practices encompass a range and variety of taxpayers from those who are fully compliant to those who are deliberately avoiding detection or are avoiding payment of liabilities.
3.6 The Tax Office comments that its challenge is to design a system which encourages voluntary compliance through balancing collection from compliant taxpayers with focusing its resources on those areas which will achieve a broader outcome.
3.7 Additionally, the Tax Office has powers that other creditors do not.
- The Tax Office may issue an equivalent to a garnishee notice (see below) without a court order, without obtaining judgment and without the third party holding any money at the time of issue of the notice.
- The Tax Office may pursue directors of companies without needing to have formal guarantees in place.
Laws administered by the Commissioner
3.8 The Tax Office states that it must conduct itself materially differently from a commercial organisation because various laws impose obligations on it that require it to do so. There are no laws that require the Commissioner to treat small businesses differently from other classes of taxpayers when recovering tax debts.
3.9 The Tax Office administers a range of laws which affect the Commonwealth's and States' revenues—for example:
- revenue laws, such as income tax, excise, and the GST;
- laws delivering benefits in areas such as family assistance, private health insurance and equalisation deposits; and
- laws aimed at achieving other policy objectives, such as private health insurance, retirement savings and research and development.
3.10 There are various laws which influence the way in which the Tax Office manage tax debts—for example, the Public Service Act 1999 prescribes a code of conduct for all Commonwealth employees and the Financial Management and Accountability Act 1997 (FMAA 1997) places obligations on Commonwealth officers in dealing with Commonwealth money and property and the recovery of debt.
3.11 Further guidance on the Tax Office's management of debt is set out in several Tax Office policy documents. These are outlined further below.
Tax Office resources
Tax Office organisational structure and staffing
3.12 The Tax Office includes the debt collection function within its definition of 'receivables management'. This includes:
all the processes, interactions, products and activities involved in managing the primary obligations (i.e. lodge and pay) of a known client, from before the liability arises to collection of the debt, for example, advising tax liabilities, managing debts, collecting money, securing lodgment of returns, chasing outstanding debts. Managing receivables also includes the supporting business systems.
3.13 Of the Tax Office governance documents, the Operations sub-plan sets objectives for the Tax Office's receivables management functions. In relation to tax debts, the sub-plan states that the Tax Office aims to maintain collections and reduce debt holdings.
3.14 The Tax Office's internal organisational structure in dealing with debt is located within the Operations business line headed by a Deputy Commissioner. An Assistant Deputy Commissioner assisted by six senior executives and approximately 3170 staff manages the debt and lodgment process.
They are organised into teams of approximately 15 staff, located in 27 sites around Australia. Team leaders are normally APS 6 level, and teams have 1 or 2 coaches at APS 4 level, and a technical adviser at APS 5 level.
3.15 Most tax officials involved in debt recovery are also involved in managing taxpayers' lodgment obligations. The Tax Office is of the view that its debt recovery function is entwined with its lodgment management function. Under the tax laws, taxation liabilities are raised on lodgment of certain electronic and paper forms, such as the Business Activity Statement and income tax return form.
3.16 Approximately 500 of the total staff above are dedicated to managing lodgment compliance. This means that approximately 2,600 staff are involved in directly managing debt recovery or involved in supporting those directly involved.
Tax Office policies
3.17 The Tax Office publishes numerous documents to provide guidance to staff on the exercise of its powers and fulfilment of its role. In relation to tax debt collection, the most important documents are the ATO receivables policy, the Chief Executive Instructions on debt management, the Taxpayers' Charter and the Compliance Model.
ATO receivables policy
3.18 The Commissioner of Taxation is required by legislation to recover taxation liabilities from those required by law to pay. The Commissioner is assisted in exercising his powers by public servants, collectively called the Australian Taxation Office or Tax Office. To provide guidance to these officials in the exercise of these powers, the Commissioner publishes policy documents and requires these officials to follow them.
3.19 The primary policy document for the collection of debt is the ATO receivables policy. This document sets out the Tax Office's approach to debt collection and lodgment matters. It is made up of 123 chapters and is available electronically from the Tax Office's website.
Principles in the ATO receivables policy
3.20 The ATO receivables policy sets out the underlying principles of the Tax Office's receivables management and their application to specific aspects of debt management. Application to specific aspects of debt management is discussed in the following chapters of this document. The ATO receivables policy identifies the following underlying principles:
- taxpayers should pay debts when due;
- the Tax Office is not a credit provider;
- officials must adopt the most appropriate remedy in dealing with non-compliant taxpayers;
- actions are to be perceived as equitable by those taxpayers who do comply with their obligations;
- 6debt is to be managed on a risk management basis; and
- officials must be empathetic to viable businesses that have made a genuine attempt to implement the new tax system.
Taxpayers to pay debts when due
3.21 In the ATO receivables policy, the Tax Office states that all taxpayers should pay taxation debts as and when they fall due. This is because:
[t]axpayers are expected to take responsibility for their taxation obligations, and to organise their affairs in such a way as to be able to discharge those responsibilities when required. The Commissioner expects that taxpayers will give the same priority to taxation obligations as their other responsibilities.13
3.22 The Government relies on the revenues collected from taxation liabilities to fund public programs. Paying tax debts on time may reduce interest on public debt. If the taxes are paid late then the Government may need to borrow amounts to cover the shortfall in funding.
3.23 The Tax Office is of the view that the general interest charge (GIC) is a means to cover expenses incurred by late payment of tax debts. However, the Explanatory Memorandum to the Bill which introduced a separate interest charge regime in 1992 described this charge as being 'compensation to the Revenue for the time value of money'.
3.24 Following the introduction of the new GIC regime in 1999 it was noted that:
the Government considers that a 7 percentage point margin is sufficient to support the policy objectives that taxpayers should pay their tax liabilities on time and not use the Commonwealth as a lending authority.14
3.25 Under section 204 of the Income Tax Assessment Act 1936, a person is liable to pay a GIC if an amount of tax assessed remains outstanding after the date it is due and payable.
3.26 The GIC is calculated in accordance with section 8AAC of the Taxation Administration Act 1953 (TAA 1953) on any amounts outstanding after the date it is due and payable. Currently this rate is set at a 12.43 per cent annual compounding rate made up of a rate reflecting short term lending rates—the monthly average yield of 90-day Bank Accepted Bills published by the Reserve Bank of Australia—plus an 'uplift' factor of 7 percentage points.
Tax Office is not a credit provider
3.27 The Tax Office states that it is not a lending institution or credit provider. However,
[i]n limited, genuine circumstances, the Commissioner is prepared to … permit payment [of the tax debts] by instalments…15
3.28 One could say that the intention of Parliament in introducing the 'uplift' factor of the GIC was to serve as a disincentive to taxpayers and effect compliance by discouraging taxpayers from using the tax system as an unsecured mechanism for borrowing.16
3.29 The Tax Office considers the GIC's automatic imposition as not only compensating the government for late payment of liabilities but also as encouraging taxpayer compliance with future liabilities:
[The GIC] denies late payers an advantage over those who do pay on time. The knowledge that GIC is accruing should encourage debtors to organise their affairs in such a way as to enable them to pay on time.17
Most appropriate remedy adopted in dealing with non-compliant taxpayers
3.30 The Tax Office states that in dealing with taxpayers who do not comply with their obligations it will 'adopt the most appropriate remedy, i.e. the remedy that, based on the taxpayer's compliance history, will most likely result in both current and future compliance'. The Tax Office has indicated that it will give considerable weight to the taxpayer's compliance history when deciding the manner in which to deal with the taxpayer.
3.31 The range of non-compliant taxpayers runs from those who want to pay but cannot to those who can pay but do not or evade the taxation system altogether.
3.32 The Tax Office considers that the onus is on the taxpayer to contact it at the earliest opportunity to discuss alternative arrangements where they are not able to meet their taxation obligations or expect not being able to do so.
Perceptions of equity
3.33 The Tax Office states that:
A fundamental principle in taxation administration is that any alternative arrangements should also be perceived as equitable by those taxpayers who do comply with their obligations. A decision to enter into an alternative arrangement will take into account the particular circumstances of the taxpayer, including:
- the taxpayer's compliance history;
- whether the reasons for the potential non-compliance were beyond the taxpayer's control, and the steps taken to mitigate the effects of those circumstances;
- the ability of the taxpayer to meet the obligation within a reasonable timeframe; and
- the steps taken to ensure future taxation obligations are met on time.18
3.34 As the Tax Office cannot select which people it is to deal with like other suppliers, it develops strategies to maximise the likelihood that taxpayers will voluntarily comply with the taxation laws:
- The risk managed by those responsible for securing outstanding tax returns and statements, or for collecting outstanding tax debts (including all additional charges for late lodgment/payment imposed by legislation) is that the returns and statements will not be lodged or debts will not be paid within time frames acceptable to the Commissioner, if at all.
- For those dealing with the collection of outstanding amounts, risk is about making decisions to do something in the most cost effective and timely manner, based on an evaluation of all the circumstances.19
3.35 The ATO receivables policy sets out the three main elements that tax officials must evaluate: the nature of the risk; the risk probability; and the risk exposure.20 Generally, the overall compliance risk of the taxpayer is assessed by reference to the taxpayer's individual circumstances.
Effect of the new tax system
3.36 The Tax Office states that it has a 'clear expectation that … individuals and businesses would take reasonable steps to implement the new [tax] system'.21 However, it recognises that small businesses were affected during the transitional period and needed considerable support and assistance from the Tax Office:
During this transitional period, the Commissioner was empathetic to viable businesses that have made a genuine attempt to implement the new tax system. If those businesses made a mistake for example miscalculated their cash flows, the Commissioner considered all their circumstances, and adopted an empathetic approach to payment arrangements to ensure that the debt with the Tax Office was not, of itself, the reason for a viable business to founder.22
3.37 Views on the ATO receivables policy are outlined in Chapter 5.
Chief Executive Instructions on debt management
3.38 Section 47 of the FMAA 1997 requires a Chief Executive of an agency to recover debts for which it is responsible. In effect, section 47 places a positive duty on the Commissioner of Taxation to pursue recovery of all tax debts due to the Commonwealth. However, section 47 provides the Commissioner with a discretion not to pursue recovery where either:
- the debt has been written off, as authorised by the FMAA 1997; or
- the Commissioner is satisfied that the debt is not legally recoverable; or
- the Commissioner considers that it is not economical to pursue recovery of the debt.
3.39 The Chief Executive Instructions provide guidance to Tax Office staff on the exercise of the discretion not to pursue recovery of debts.
3.40 Generally, the Taxpayers' Charter sets out taxpayers' rights and obligations and the service standards taxpayers can expect from the Tax Office:
The Taxpayers' Charter commits the Tax Office to treating taxpayers fairly and reasonably under the law, a commitment that implies that individual circumstances are recognised and taken into account.23
3.41 Amongst other rights, the Tax Office tells taxpayers that they can expect it to:
- Treat you fairly and reasonably.
- Treat you as being honest in your tax affairs unless you act otherwise.
- Offer you professional service and assistance to help you understand and meet your tax obligations …
- Give you advice and information you can rely on.
- Explain to you the decisions we make about your tax affairs …
- Administer the tax system in a way that minimises your costs of compliance.
- Be accountable for what we do.24
3.42 The Tax Office also tells taxpayers that it expects them to:
- Be truthful in your dealings with us …
- Pay your taxes and other amounts by the due date.
- Be cooperative in your dealings with us.25
3.43 The Compliance Model is a concept which seeks to determine the most appropriate compliance response to achieve desired taxpayer behaviour. It was developed by the Cash Economy Task Force based on knowledge about the reasons why people function the way they do with the institutional arrangements of societies.26
Figure 1: The Compliance Model
The diagram is reproduced from the Auditor-General's report on the management of tax debt collection. 27
3.44 Generally, the Compliance Model comprises four parts: the factors that influence taxpayers' decisions and behaviour (BISEP); taxpayers' attitudes to compliance; the Tax Office's compliance strategies; and the Tax Office's enforcement strategies.
3.45 The left hand side of the Model specifies different types of factors that may influence a particular taxpayer's behaviour in respect to their compliance with taxation obligations.
3.46 The left hand face of the pyramid provides a continuum of taxpayers' attitudes towards compliance ranging from the 'desired state' of a taxpayer 'willing to do the right thing' to the 'undesired state' of a taxpayer's 'disengagement from the tax system' or wilful non-compliance.
3.47 The right hand face of the pyramid provides a continuum of compliance strategies that correspond to a taxpayer's attitude towards compliance.
3.48 The middle face of the pyramid indicates the Tax Office's most appropriate enforcement strategy to achieve compliance in relation to the taxpayer's attitude. For example, for those taxpayers who are in the 'desired state' of being 'willing to do the right thing', the most appropriate Tax Office compliance response may be to educate those taxpayers in what needs to be done to comply.
3.49 Essentially, the Model urges tax officials to consider a taxpayer's attitude towards compliance when choosing a compliance response towards that taxpayer. One aim is that tax officials choose compliance responses that have a future effect of moving a taxpayer towards the bottom of the pyramid away from the most severe compliance strategies:
[the Compliance Model] illustrates that the individual circumstances of a taxpayer contribute to his or her underlying attitudes to compliance and to the subsequent behaviour. Accordingly, the Tax Office's strategies, including its approach to the imposition of penalties, are designed to improve that behaviour and in the long term, the underlying attitude to compliance.28
3.50 Additionally, this Model requires the Tax Office to be aware of the factors that influence taxpayers' decisions and behaviour.
14 Explanatory Memorandum accompanying the Taxation Laws Amendment (No. 3) Bill 2001, at paragraph 4.6.
16 The Inspector-General further discusses the underlying policy of the general interest charge in his report, Review of the Remission of the General Interest Charge for Groups of Taxpayers in Dispute with the Tax Office, Canberra, November 2004; see also Explanatory Memorandum to the Taxation Laws Amendment Act (No. 3) 2001, paragraph 8.7.
18 ibid, paragraph 1.3.10.
19 ibid, paragraph 3.2.2.
20 ibid, paragraphs 3.5.1 to 3.5.6.
21 ibid, paragraph 1.3.2.
22 ibid, paragraph 1.3.12.
23 Senate Economics
References Committee, Inquiry into mass marketed tax effective schemes and investor protection-interim report, June 2001, p. 37.
24 Australian Taxation Office, Taxpayers' Charter—what you need to know, Canberra, November 2003, p. 2.
25 ibid, p. 3.
26 Second Report of the Cash Economy Task Force, Improving Tax Compliance in the Cash Economy, April 1998.
27 Australian National Audit Office, Audit Report number 23 of 1999-2000: The Management of Tax Debt Collection, 20 December 1999, pp. 119-120.