4.1 A number of submissions complained of the lack of publicly available information on the Tax Office's debt collection process.
4.2 This chapter provides an overview of the Tax Office's debt collection processes. It is based on Tax Office information.
Before debt due and payable
Timeframe from activity to liability
4.3 Australia's tax system is based on self-assessment of the tax liability for activities giving rise to an obligation to report. Reporting those activities in turn gives rise to a legal liability to pay an amount assessed by reference to the amounts reported.
4.4 Inherent in this system is a time delay between the initial activity and the legal liability to pay a tax amount.
4.5 Generally, the Tax Office is unaware of a taxpayer's tax liability until the taxpayer lodges a particular document or notifies an amount, whether through an activity statement or annual return.
After debt due and payable—automated processes
4.6 A taxation liability becomes a collectable debt once it becomes due and payable, there is no dispute as to the liability for the tax and the debt remains unpaid. Generally, the Tax Office may commence debt recovery action if the amount due and payable is not paid within an acceptable time to the Tax Office.
4.7 The potential actions the Tax Office use to recover the debt may consist of automated computer processes and those involving direct human action.
4.8 The Tax Office has automated processes in place to stream cases to the relevant areas in the Tax Office for a debt recovery response. Depending on the taxpayer, the type of debt and amount of the debt, these will initially involve an automatically generated letter or a phone call from a tax official.
Type of taxpayer or debt
4.9 The Tax Office states that it has established specialist 'project teams' to focus on and manage specific areas of risk depending upon debt or taxpayer type. The relevant debt types or taxpayers are automatically sent to the relevant project team for debt recovery action.
4.10 These project teams are established to enable the Tax Office to pull out from the mainstream processes for special attention those cases concerning identified areas of risk. Examples of these areas include scheme participants, superannuation debts and phoenix companies. The project teams have their own process for debt recovery action that is tailored to that identified risk area.
Amount of debt
4.11 The Tax Office classifies debt cases into six categories, or 'debt levels', according to the amount of debt owing.
|Debt level||Amount of debt|
|2||$2500 - $7499|
|3||$7500 - $ 24,999|
|4||$25,000 - $49,999|
|5||$50,000 - $99,999|
Source: Tax Office
4.12 The Tax Office uses the term 'lower debt levels' to refer to debt levels 1 to 3. The term 'higher debt levels' refers to debt levels 4 to 6.
Lower debt levels
4.13 The Tax Office advises that, in relation to the lower debt levels, it may send out an automatically generated letter where it has not received payment within a specific timeframe. The Tax Office calls this letter a 'soft' letter. The Tax Office states that the tone of the letter is non-threatening and aimed at reminding the taxpayer that they may have forgotten that they have a debt and that it is outstanding. The Tax Office states that 60 per cent of cases will pay immediately following this letter.
4.14 If no payment is received within a period of time following the soft letter, another automatically generated letter may be sent out. The Tax Office calls this letter a 'firm' letter.
4.15 If no payment is received within a period of time following the firm letter, a third automatically generated letter is sent out. The Tax Office calls this letter a 'hard' letter.
4.16 For the cases with higher amounts in the lower debt levels, where no response is received, the case is sent to an outbound call centre (see below) for prioritisation and possible follow up action.
Higher debt levels
4.17 For the higher debt levels, if no payment is received within 24 hours to 7 days following the date due and payable, the case is sent to an outbound call centre (see below) for prioritisation and possible follow-up action.
Payment arrangement interactive voice phone line
4.18 On its letters sent to debtors, the Tax Office provides details of a phone line through which a debtor may propose a payment arrangement—the payment arrangement interactive voice response (IVR) phone line.
4.19 This IVR phone line is linked to an automated program that prompts debtors to provide identifying information, proposed repayment amounts and frequency of repayments. The program uploads the recorded information to the Tax Office's mainframe systems overnight. The mainframe systems checks that the data is valid and that the proposal meets the Tax Office's business rules for accepting payment arrangements.
4.20 The Tax Office advises that these business rules are not absolute as debtors with extraordinary circumstances may contact the Tax Office's call centre staff to discuss alternative arrangements.
4.21 The Tax Office reports:
Approximately 60,000 taxpayers with debts totalling $24 million have used the service to establish a payment arrangement since July 2003.
4.22 The Tax Office did not provide a break up of this figure into number of small businesses or number of recurrent debtors.
After debt due and payable—manual processes
4.23 The Tax Office has a number of business areas that focus on different aspects of the debt recovery process. These areas are discussed below.
4.24 However, the Tax Office states that it does not have enough resources to action manually every debt case each year. Therefore, it must prioritise cases for attention by tax officials.
4.25 The Tax Office has implemented an automated system, Net Risk, which was designed to select those cases for human response that posed the greatest risk of non-payment without tax official intervention. The Net Risk system is based on a two-stage process: determining 'likelihood' and 'consequence'.
4.26 'Likelihood' indicates the likelihood that a particular debt case will require 'high-end' debt recovery action through some human intervention. This is calculated by comparing the case with a risk matrix of 46 characteristics that have been identified as historically indicating that likelihood. The Tax Office contracted academic mathematicians to develop an algorithm based on this matrix of characteristics.
4.27 Once this algorithm is applied to a particular debt case it is given a numerical score and allows a comparison against other cases.
4.28 However, a case's likelihood score is disregarded when considering which cases should receive 'high-end' debt recovery action through some human intervention. The Tax Office states that the function was providing results which were inconsistent with the Tax Office's allocation of resources.
4.29 The Tax Office prioritises its recovery resources on the basis of the value of the debt outstanding—that is, the larger the debt the more likely the case will receive 'high-end' debt recovery action through some human intervention. The exception to this are the cases referred to the Tax Office's 'project teams'.
4.30 'Consequence' generally refers to determining the appropriate response that will achieve recovery of the debt. Examples of responses include garnishing bank accounts, entering into payment arrangements and issuing Director Penalty Notices.
4.31 The Tax Office is not using the consequence function of Net Risk as it states that the function was providing results which were inconsistent with the Tax Office's allocation of resources. It states that it is aiming to incorporate a similar function into the Tax Office's 'Change Program' to be implemented by December 2008. The Tax Office states that this new system will enable the Tax Office to better filter those cases requiring human intervention and better indicate appropriate responses.
4.32 Effectively, Net Risk does not determine either a debt case's priority or indicate an appropriate compliance response. In the meantime, the Tax Office uses its computerised Receivables Management System (RMS) to:
- stream debt cases to different business areas based on internal business rules; and
- prioritise debt cases for action by those business areas based on the case's debt levels.
4.33 Concerns were raised in relation to the Tax Office's effectiveness in case selection and methods of risk assessment. In the Inspector-General's view these issues would be more appropriately considered by other bodies. However, these issues do affect the equitable treatment of taxpayers. This aspect of these issues is considered further in chapters 5 and 6.
Main business areas
4.34 The following are the main business areas of the Tax Office that are tasked to manage debt:
- call management centres;
- outbound call centres;
- arrangement management teams;
- pre-legals teams;
- legals and complex case teams; and
- insolvency teams.
Call management centres
4.35 Various debt- and lodgment-related letters and publications contain a telephone number, 13 1142, though which taxpayers may contact the Tax Office to discuss debt- and lodgment-related matters. Calls on this number are directed to the call management centres. Other areas of the Tax Office may also direct calls to the call management centre where debt and lodgment issues are raised by external callers.
4.36 Approximately 400 tax officials staff call management centres in six sites across Australia.
4.37 Staff in the call centre management centres have the delegation and authorisation to:
- remit the general interest charge on the grounds of a Tax Office error;
- defer the date due and payable for tax debts;
- suspend debt collection activity; and
- agree to arrangements to pay a tax debt by instalments.
4.38 Staff record notes of their calls with taxpayers in electronic 'narrations' recorded on the RMS.
4.39 Representatives of staff from these areas indicated that the focus of their work in relation to debtors was to 'keep the taxpayer engaged in the tax system' by entering arrangements. Generally, this focus is an application of a compliance strategy based on the compliance model (see Chapter 3). It seeks to change a debtor's compliance behaviour from paying only if forced to resigned self-enforced compliance with payment obligations. These staff rely on the taxpayer's assessment of their own capacity to repay.
4.40 Staff receive guidance through a number of documents, team and national support networks. The guiding documents include the ATO receivables policy, call centre scripting and practice notes.
4.41 Staff deal with work on a transactional basis. They do not have ongoing contact with particular taxpayers and finish their involvement with the taxpayer's case once the purpose of the call is fulfilled.
Outbound call centres
4.42 Outbound call centres are the areas which initiate contact with those debtors in identified areas of risk who have not contacted the Tax Office. This centre's workload is generated by the RMS identifying cases selected for Tax Office-initiated contact. Approximately 240 tax officials staff the outbound call centres in six sites across Australia.
4.43 The RMS allocates cases for staff to action. Allocation is made on the basis of level of debt, available resources and identified skills. Staff undertake preliminary work to establish the debt then contact the debtor to determine the reason for non-payment of the debt. Their aim is to achieve payment of the debt either in full or by instalments, rectify non-compliant behaviour and case manage, to a limited extent, the debtor. The outbound call centres aim either to agree and monitor the initial payment of an acceptable payment arrangement or to escalate the matter to the pre-legals team when negotiations break down.
4.44 The Tax Office states that in circumstances where debtors have defaulted on a previous payment arrangement with the Tax Office, outbound call centres attempt to keep the taxpayer engaged by entering into another payment arrangement. The telephone conversations are noted and recorded by staff on the RMS.
Arrangement management teams
4.45 The arrangement management teams deal with defaulted payment arrangements and provide a focus of Tax Office expertise in payment arrangements. This centre's workload is generated by the RMS identifying cases selected for Tax Office-initiated contact. Approximately 333 tax officials staff the arrangement management teams in five sites across Australia.
4.46 The RMS allocates cases for staff to action. Allocation is made on the basis of level of debt, available resources and identified skills. Lower debt level cases are sent automatically generated letters asking the debtor either to pay or call the call centre management teams.
4.47 Staff undertake preliminary work to familiarise themselves with the case and determine a process of negotiation. The Tax Office states that staff will call the debtor to clarify facts and issues, determine the reasons for default, seek to understand the business pressures and negotiate for another payment arrangement. Staff aim at keeping the taxpayer engaged in the system. They obtain financial information and determine the taxpayer's capacity to repay.
4.48 The Tax Office states that the arrangement management teams recognise that small business operators may be fearful of Tax Office debt collection activity. Such taxpayers may try to agree to further payment arrangements to get off the phone quicker without fully considering their capacity to make the instalments. Therefore the teams seek to determine these taxpayers' other debts and due dates, and income or ability to pay.
4.49 In the event that a payment arrangement is not entered into, staff will consider whether legal action is worthwhile. Chapters 21 and 26 of the ATO receivables policy set out the principles to be applied in making this decision. If legal action is determined to be worthwhile, the case will be prepared for legal action and referred to the legals area. If it is not worthwhile, the debt will be written-off as uneconomical to pursue (see 'Write off' below). However, the written off amount may be re-raised at a later date if the circumstances change.
4.50 The Tax Office states that approximately 4 per cent of arrangement management team cases are referred to the legals teams for legal action.
4.51 The arrangement management teams also seek to determine systemic reasons for taxpayer payment arrangement defaults.
4.52 The pre-legals teams receive cases referred to them by the outbound call centres. They also focus on areas of identified risk. Approximately 150 tax officials staff pre-legals teams in five sites across Australia.
4.53 The RMS allocates cases for staff to action. Allocation is made on the basis of level of debt, available resources and identified skills. Staff initially review cases to ensure that the taxpayer understood they had been given a reasonable opportunity to enter into a payment arrangement. Cases where taxpayers either did not understand or were not given a reasonable opportunity are contacted by either the outbound call centres or the pre-legals teams.
4.54 Failing the agreement of a payment arrangement, staff will investigate options for recovery of funds from debtors. Notices of intended legal action will be sent to the debtor. Depending on the type of debt and debtor, the notices may refer to possible garnishee action, Director Penalty Notices and statutory notices for winding up. The notices have the direct contact details of the staff member who is managing their case.
4.55 Taxpayers who contact the staff member have the option to enter a payment arrangement. Representatives from the pre-legals area stated that this does not happen often because their cases often involve a history of defaulted arrangement without reasonable evidence of a change in financial circumstances. The reasons for declining to accept a payment arrangement proposal are given in writing. If a suitable payment arrangement is not negotiated, staff will consider whether legal action is worthwhile in the same manner as the arrangement management teams (see above).
4.56 The Tax Office states that staff will also seek to educate the debtor as to why this action is occurring, what further steps the Tax Office will take and what the debtor's obligations are.
4.57 Cases that involve complex issues, such as possible insolvency, are referred to the complex case area of the legals teams.
Legals and complex case teams
4.58 The legals and complex case teams deal with those matters where there is a significant risk to revenue or some issue involving significant sensitivity or complexity. Cases referred to this area are either from a legals referral or a non-Tax Office initiated winding-up letter. Approximately 215 tax officials staff legals and complex case teams in 16 sites across Australia.
4.59 In the event of a matter of significant complexity or sensitivity, a legals team leader may be contacted by the compliance areas of the Tax Office for advice before the tax liability is determined. Following the determination of liability, the complex case team will be responsible for debt collection activities concerning that entity.
4.60 In the event of non-Tax Office initiated winding-up proceedings, the complex case area will determine, in accordance with chapters 18, 20 and 26 of the ATO receivables policy, whether the Tax Office will support the action.
4.61 In the event of a legals referral, staff will undertake preliminary work to assess whether all alternative debt collection action has been taken and that the proposed legal action is appropriate in the circumstances. Once satisfied, staff will instruct the Tax Office Legal Services Branch to commence legal proceedings to obtain a sequestration order or winding-up notice. If not satisfied, staff will either refer the case back to the referring area for further action or write off the case as uneconomical to pursue (see below).
4.62 Where the taxpayer is a corporate entity, the ATO receivables policy outlines a number of factors that should be considered before initiating liquidation action, including:
- the asset position of the company;
- the nature of the debt;
- the future income of the company;
- the risk to the revenue;
- the potential to recover from directors;
- whether there are matters that may warrant an examination by a liquidator; and
- whether there is evidence of fraudulent or criminal activities on the part of the directors.
4.63 Where satisfied, tax officials will serve a notice in terms of section 459E of the Corporations Act 2001 and if payment is not made within 21 days or if suitable payment proposals are not agreed within that time, they will apply to the court to have the company wound up. If the company fails to comply with the demand to pay, it is presumed to be insolvent and its presumed insolvency may be used as a ground for winding up the company by the creditor who made the demand or by any other creditor or any other applicant for winding up.
4.64 The Tax Office indicates that action to wind up a company will be taken in circumstances where the company has failed to pay its debts and there has been no agreement on payment proposals. This action will also be taken in circumstances where it is considered a company is insolvent and there will be a detrimental effect on the revenue if it is allowed to continue to trade.
4.65 Liquidation occurs where a corporate debtor's affairs are placed into the hands of a liquidator. A liquidator will take steps to dispose of the debtor's assets to raise funds to meet the proven debts of all creditors.
4.66 Where the taxpayer is an individual, tax officials must be satisfied that the debtor is in fact insolvent. The ATO receivables policy outlines a number of factors that should be considered before initiating bankruptcy action, including:
- the asset position of the debtor;
- the nature of the debt;
- the future income of the debtor;
- the risk to the revenue;
- the cost of bankruptcy and the likely return;
- whether special circumstances exist; and
- whether the debtor is divesting himself or herself of assets.
4.67 The insolvency teams deal with cases where a debtor is declared bankrupt, is proposing to appoint an administrator, or is in liquidation. In relation to individuals, Insolvency and Trustee Services Australia notifies the insolvency teams on a weekly basis of those declared bankrupt and those who have been discharged from bankruptcy. Where the Tax Office is a creditor of a company in liquidation or administration, the administrator or liquidator is required by corporations law to notify the Tax Office of the liquidation or administration. Approximately 150 tax officials staff insolvency teams in seven sites across Australia.
4.68 In relation to bankrupts, the insolvency teams will consider any Part IX or Part X (of the Bankruptcy Act 1966) arrangement. The insolvency teams monitor the progress of the trustee-in-bankruptcy's work and write off the debt as irrecoverable in law (see below) once distribution of the bankrupt's property is completed.
4.69 In relation to companies in liquidation, the insolvency teams will provide the liquidator with the proof of debt, meet with the liquidator if the liquidator decides investigation is warranted and receive the liquidator's annual and final reports.
4.70 In relation to companies proposing voluntary administration, the insolvency teams are the proxy holders for the creditors' meetings and decide how the Tax Office will vote at these meetings.
4.71 The insolvency teams determine whether to support a proposal to appoint particular administrators. They also determine whether to support an administrator's recommendations. Preliminary work is undertaken to establish the debt, to trace assets, to investigate business relationships and to determine consistency of information. Also, insolvency teams determine if information divulged by creditors at meetings is inconsistent with the company's claims.
Quality assurance, professional accreditation and knowledge network
4.72 Through a system of quality assurance, professional accreditation, skilling and a knowledge network, the Tax Office states that it assures itself that staff meet certain technical standards and that faults are identified.
4.73 The Tax Office states that it has three methods of assuring itself of the consistent and accurate application of rules to specific circumstances by tax officials involved in debt collection: technical quality review, functional analysis and team-based analysis.
Technical quality review
4.74 The technical quality review process assesses written interpretive advice to identify faults in policy, procedure and skilling. It does not identify faults in the balance that the ATO receivables policy strikes to achieve between the collection of the outstanding debt and ensuring a fair and equitable outcome. Where faults are identified the individual and their manager are notified and, if serious, senior tax officials as well. The results are collated and put on a register from which some qualitative analysis is undertaken and remedial strategies developed.
4.75 There are two types of functional analysis: analysis in an area of risk identified by senior tax officials on an ad hoc basis; and analysis of a specific debt function over a period of time. Functional analysis provides feedback to the head of the functional area reviewed—for example, feedback has been provided to the head of the arrangements management area on a monthly basis since August 2003.
4.76 Team-based analysis is done within a team environment and tied to the performance of the tax official. Teams each have a team coach, a technical adviser and a team leader. Generally, performance is actively monitored by the team coach.
Professional excellence and accreditation
4.77 The professional excellence and accreditation process was initiated as a response to the Sherman report findings.29 This process requires technical advisers at a senior level—the APS5 to EL1 level—to obtain and maintain professional accreditation.
4.78 Professional accreditation workshops assess staff's capabilities in decision-making. This assessment is based on historical information comprising a portfolio of previous decisions and an interview-like discussion, interview questions and a process check comprising a scenario and negotiation with colleagues and a 'taxpayer' to reach agreed outcomes.
4.79 From this process, training package development may be recommended for staff. If there is a deficiency, a report may be made to a staff member's team leader to recommend steps to address that deficiency in the staff member's learning plan.
Debt and Lodgment Learning Network
4.80 The Debt and Lodgment Learning Network is a forum of tax officials at the APS 4 and 5 levels in regional areas who meet to discuss issues of concern with a view to identifying steps and changes for improvement.
Debt recovery responses available to Commissioner
4.81 The Commissioner is empowered with a variety of responses to recover tax debts. These responses are outlined below. Responses that raise issues of concern are discussed in more detail in the following chapters.
4.82 Under Part IIB of the Taxation Administration Act 1953 (TAA 1953), the Commissioner may offset a refund or credit owing to a taxpayer against a debt owed by the same taxpayer. The process is generally automatic but is subject to rules which except certain categories of taxpayers and circumstances in connection with the timing of establishment of some liabilities.
4.83 Generally, the general interest charge (GIC) is a charge for unpaid taxes calculated on a daily balance. The rate of the GIC is set at the monthly average yield of 90-day Bank Accepted Bills published by the Reserve Bank of Australia plus an additional 7 percentage points.
4.84 Section 8AAG of the TAA 1953 provides that the Commissioner may remit all or part of the GIC where the Commissioner is satisfied that either:
- the circumstances that contributed to the delay in payment were not due to, or caused directly or indirectly by, an act or omission of the person and the person has taken reasonable action to mitigate, or mitigate the effects of, those circumstances; or
- the circumstances that contributed to the delay in payment were due to, or caused directly or indirectly by, an act or omission of the person and the person has taken reasonable action to mitigate, or mitigate the effects of, those circumstances and having regard to the nature of those circumstances, it would be fair and reasonable to remit all or a part of the charge; 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.
4.85 Chapters 91 and 93 of the ATO receivables policy provide further guidance to tax officials exercising the Commissioner's discretion to remit the GIC.
Circumstances beyond taxpayer control
4.86 The Tax Office indicates that it may remit the GIC where a taxpayer demonstrates that their cash flow difficulties were due to factors beyond their control and clearly could not be predicted. Examples provided include natural disasters, industrial action, collapse of a major debtor and sudden ill health of key personnel.
4.87 Taxpayers need to show that the circumstances had a specific impact on their ability to pay the tax debt. The Tax Office states that merely arguing an economic downturn, adverse business conditions or fluctuations in currency exchange rates are not sufficient to demonstrate a specific impact.
Acts or omissions of a taxpayer
4.88 The Tax Office indicates that it may remit the GIC where the non-payment of the debt is caused by the direct involvement of the taxpayer but non-payment was not the intended outcome. The policy indicates that the Tax Office may remit where the taxpayer can demonstrate 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:
A soundly advised or well considered decision which results in unforeseen severe consequences affecting a debtor's ability to pay might otherwise gain some remission.30
4.89 The Tax Office indicates that it will not remit the GIC where non-payment of a tax debt is caused by an extended credit policy which adversely affects their cash flow, by using available funds to acquire assets or by paying other creditors.
Fair and reasonable to remit
4.90 Remission on fair and reasonable grounds must not result in an unfair advantage:
a debtor who pays late should not be given any advantage over those taxpayers who organise their affairs to ensure they can pay on time. Debtors will need to demonstrate that it is fair and reasonable to remit the GIC, having regard to the nature of the specific event or decision.31
Otherwise appropriate to remit the GIC
4.91 The policy sets out specific examples of when it would otherwise be appropriate to remit the GIC—for example, where recovery of the GIC would cause hardship. Discretion to remit on this ground is limited to senior tax officials.
4.92 The Tax Office indicates that in exercising the discretion to remit the GIC it will consider as relevant factors a taxpayer's payment history, the steps they have taken to mitigate the circumstances leading to the non-payment of the tax debt and the effect of the debt.
4.93 Section 8AAG of the TAA 1953 empowers the Commissioner with a wide discretion to remit all or part of the GIC payable by taxpayers. The Commissioner will generally not exercise his discretion to remit GIC payable on outstanding debt as a part of a payment arrangement.
4.94 Section 255-15 of Schedule 1 of the TAA 1953 provides the Commissioner with power to accept payment arrangements for the repayment of tax liabilities. A tax liability is defined in section 255-1 as a pecuniary liability to the Commonwealth arising directly under a taxation law.
4.95 A payment arrangement will not vary the time at which the amount is due and payable. Therefore, the GIC or any other applicable penalty for the unpaid amount will continue to accrue after the date the debt is due and payable.
4.96 Where the Commissioner accepts a payment arrangement and the taxpayer meets that arrangement, the Commissioner will generally not exercise his power under subsection 255-5(2) to sue and recover the outstanding debt.
4.97 Debtors may also contact the call management centres to enter payment arrangements. Tax officials in the outbound, pre-legal and legals areas will seek to initiate contact with debtors with a view to recovering payment either in full or by way of a payment arrangement.
4.98 The legal instrument conferring legal authority to exercise powers on behalf of the Commissioner, the Instrument of Authorisation—Operations Program, indicates that staff at every level in the Operations Program may enter payment arrangements on behalf of the Commissioner without limitation on amount or time period. However, under the Taxation Authorisation Guidelines, a document that guides Tax Office staff on what powers they may exercise, staff have authority to enter agreements according to the limitations set out in the following table.
|Officer level||Limit of period||Monetary limit|
|APS 1||Not authorised||Not authorised|
|APS 2||6 months||$50,000|
|APS 3||12 months||$150,000|
|APS 4||18 months||$500,000|
|APS 5||24 months||$1,000,000|
|APS 6||No limit||$2,500,000|
|EL 1, EL 2 and SES||No limit||No Limit|
Source: Tax Office
4.99 The Commissioner's policy in exercising his discretion to enter into payment arrangements is set out in the ATO receivables policy. Chapter 5 outlines general principles expressed in the ATO receivables policy. Further elucidation of these principles in relation to payment arrangements is given in Chapter 10 of that policy. The Tax Office also provides further guidance to staff in the form of self-paced electronic training modules and procedures.
4.100 A 'write-off' effectively means that the Tax Office will not pursue the debt because it is either not legally recoverable or it is not cost-effective to pursue the debt. A write-off will not extinguish the debt. The Tax Office will continue to pursue the debt where it becomes apparent that the taxpayer has available funds to meet the debt. The ATO receivables policy indicates that where a written off debt is eventually re-raised the 'additional charges for late payment' should be imposed.
4.101 Section 47 of the Financial Management and Accountability Act 1997 (FMAA 1997) places a positive duty on the Commissioner of Taxation, among other chief executives, to pursue recovery of all debts due to the Commonwealth for which the Commissioner is responsible. However, section 47 allows the Commissioner not to pursue recovery where, amongst other factors, the Commissioner considers that it is not economical to pursue recovery of the debt.
4.102 The Commissioner has delegated this power to certain other tax officials. The Commissioner's Chief Executive Instruction on debt management and chapter 26 of the ATO receivables policy provide further guidance to Tax Office staff.
4.103 The Tax Office interprets 'uneconomical to pursue' as a combination of:
uneconomical to pursue and irrecoverable because a debtor is without assets/funds and there was little chance of the financial circumstances improving.
4.104 For a debt to be uneconomical to pursue, a delegate must be satisfied that on all the facts it is probable that the total costs of recovery action will exceed the return to the Commonwealth. This is to be decided on a case-by-case basis.
4.105 In relation to the assets and funds of a debtor, the ATO receivables policy asks delegates to consider alternative action before a write-off such as bankruptcy, garnishee notices, payment arrangement and section 255 notices.32
4.106 A compromise is an arrangement in which the Commissioner accepts an amount less than the primary tax outstanding in full settlement of an undisputed debt. It is made in circumstances where a taxpayer does not have the capacity to pay a debt in full. By contrast, an arrangement in which the Commissioner accepts less than the primary tax in full settlement of a disputed debt is called a 'settlement' by the Tax Office.
4.107 The Commissioner has the power to compromise an undisputed debt in respect of a range of taxation debts including income tax, GST, fringe benefits tax and superannuation surcharge.
4.108 The general administrative power to compromise each type of taxation debt is provided for in a range of Acts. For instance, section 8 of the Income Tax Assessment Act 1936 in combination with section 255-5 in Schedule 1 of the TAA 1953 allows the Commissioner to compromise an undisputed income tax debt. A list of the range of sections and Acts under which the Commissioner has the power to compromise an undisputed taxation debt can be found at paragraph 27.2.1 of the ATO receivables policy. However, as previously discussed, section 47 of the FMAA 1997 imposes certain qualifications to the general administrative power the Commissioner may have to compromise a tax debt.
4.109 Chapter 27 of the ATO receivables policy deals with the Commissioner's ability to resolve undisputed taxation debts by compromise. Its intention is to provide guidance for deciding what is an appropriate case for compromise and considers the following:
- cases where the Commissioner will not compromise a debt;
- cases where the Commissioner may compromise; and
- the procedures that need to be followed to implement a decision to compromise a debt.
4.110 Division 340 of Schedule 1 to the TAA 1953 confers a discretion on the Commissioner to release taxpayers from tax-related liabilities on the grounds of the taxpayer suffering serious hardship. A 'release' is a term used in taxation law to mean the extinguishment of a taxpayer's tax liability.
4.111 The Minister for Finance and Administration may permanently waive a taxation liability. This means the taxpayer would not be required to pay the amount to the Commonwealth. The most common condition under which a waiver may be granted is that where, due to the particular circumstances of the case, the decision-maker concludes that there is a moral obligation, rather than a legal obligation, on the Government to extinguish the debt due to equity or ongoing financial hardship considerations.
Departure prohibition orders
4.112 Another debt recovery response is for the Tax Office to obtain a departure prohibition order. Generally, a departure prohibition order is an order by the Commissioner that a taxpayer with outstanding tax liabilities is prohibited from leaving Australia without making arrangements to discharge those liabilities.33 The penalty for contravening such an order is $5000, 12 months imprisonment or both.
4.113 A garnishee notice requires a person who owes, or holds on account, money payable to the taxpayer to pay it to the Tax Office instead.
4.114 The Tax Office states that it uses garnishee notices where it considers it to be the most effective method of resolving the debt, in particular where the taxpayer is not cooperating to bring their taxation obligations up to date.
Director Penalty Notices
4.115 Directors of companies are personally liable to pay, by way of penalty, amounts equal to any unpaid amounts of Pay As You Go withholding tax. The Tax Office will issue Director Penalty Notices to a director where the company has failed to respond to previous opportunities to bring their obligations up-to-date or enter into alternative arrangements, such as the payment of arrears by instalment.
4.116 When a Director Penalty Notice is issued, the directors of the company can take any of the four options listed below within 14 days of the service of the notice to avoid personal liability for the unpaid tax:
- pay the liability;
- appoint an administrator to the company;
- commence winding-up proceedings; or
- enter into an agreement under section 222ALA of the ITAA 1936.34
4.117 If the directors do not respond within 14 days, then recovery action can be taken against them individually for the total liability. Each director is jointly and severally liable for the debt.
4.118 The Tax Office indicates that the decision to issue a Director Penalty Notice is based on the compliance history of the taxpayer company and the nature of the tax outstanding. As it only relates to certain types of tax, the Tax Office states that it is often necessary to issue these notices in conjunction with other actions, such as winding-up proceedings.
Bankruptcy and liquidation
4.119 Bankruptcy occurs when a debtor's property is placed under the control of a trustee in bankruptcy for the benefit of creditors. A debtor may declare themselves bankrupt (a voluntary bankruptcy) or the court may order the sequestration of the bankrupt's estate (a creditor's petition).
4.120 Liquidation occurs where a corporate debtor's affairs are placed into the hands of a liquidator. A liquidator will take steps to dispose of the debtor's assets to raise funds to meet the proven debts of all creditors.
4.121 A notice under section 459E of the Corporations Act 2001 can be used to establish evidence of corporate insolvency. The notice is a formal document which requires a company to pay, secure or compound its debt within 21 days of service.
4.122 A judgement or court order is not required before liquidation is commenced. If the company fails to comply with the demand to pay, it is presumed to be insolvent and its presumed insolvency may be used as a ground for winding up the company by the creditor who made the demand or by any other creditor or any other applicant for winding-up.
29 Sherman, Report of an Internal Review of the Systems and Procedures relating to Private Binding Rulings and Advance Opinions in the Australian Tax Office, August 2000.
31 ibid., paragraph 93.5.13.
32 A section 255 notice relates to a resident with control of a non-resident's money.
33 For examples, see 'Departures can prove taxing', Canberra Times, 9 May 2004, p. 33.
34 This is generally an agreement in which a company director undertakes to ensure that the company remits amounts that the company has withheld under the Pay As You Go system, or amounts that the Commissioner reasonably estimates to have been withheld by the company, but were not remitted to the Tax Office.