6.1 The second focus for the terms of reference asks the Inspector-General to consider the manner in which the Tax Office implements its small business debt collection practices. All submissions considered this issue.
6.2 The third focus for the terms of reference asks the Inspector-General to examine the impact of the Tax Office's small business debt collection policies and practices on aspects of that collection. One of those aspects specified in the terms of reference is the Tax Office's management of debt collection cases.
6.3 This chapter will outline the views expressed on the Tax Office's small business debt collection practices generally and the Tax Office's management of debt collection cases. These views overlap to some extent with those expressed in the later chapters. The later chapters focus on specific aspects of the Tax Office's debt collection practices.
6.4 Submissions raised a variety and range of themes and issues on the Tax Office's implementation of debt collection policies and the impact of the Tax Office's management of debt collection cases. The views expressed on these themes and issues sometimes conflicted. They are:
- There are a variety of systemic problems with the Tax Office's debt collection practices.
- There are no apparent significant or systemic problems with Tax Office's debt collection practices.
- The Tax Office's flexibility allows small businesses sufficient opportunity to trade out of debt where that business maintained contact with the Tax Office.
- The Tax Office's flexibility in collecting debt has an undue adverse effect on other creditors of a debtor business, which usually include other small businesses.
- The Tax Office does not understand the underlying causes of small business collectable tax debts.
- Tax Office staff do not appreciate the pressures faced in running a small business.
- The Tax Office could implement fair and more effective solutions.
- The Tax Office lacks the ability to distinguish between small businesses who seek to meet their tax obligations but have difficultly doing so and those who could pay but seek to avoid or defer obligations.
- The Tax Office would benefit from coordinating the actioning of debt collection cases with the Australian Securities and Investments Commission.
- The ATO receivables policy is applied haphazardly and inconsistently.
- There is an inconsistent approach between different Tax Office sites that handle debt collection cases.
- There is an inconsistent approach between different levels of tax officials.
Certainty and transparency
- Tax practitioners and small businesses find it difficult to determine how the Tax Office implements the ATO receivables policy.
- There is insufficient transparency in the debt collection process as a debt case moves from one area within the Tax Office to another for actioning.
- The Tax Office is not timely in its recovery of debt.
6.5 Specific aspects of the Tax Office's implementation of debt collection policies—payment arrangements, legal recovery action, compromise of tax debts and release—are discussed in the following chapters.
6.6 Overall, submissions voice a variety of concerns with the Tax Office's debt collection practices. With the exception of the Taxation Ombudsman, submissions indicated that these concerns were of a systemic nature.
6.7 The Ombudsman submits that notwithstanding the complaints received and investigations conducted by his office:
it is not apparent that there are any significant or systemic problems with ATO tax debt collection practices.39
6.8 The Ombudsman reported in his 2003 annual report that almost a quarter of complaints to his office about the Tax Office were related to debt collection, particularly the application of penalties, negotiations over payment arrangements and the attitude of debt collection staff.40
6.9 The Ombudsman found the Tax Office open and cooperative if debtors initiated contact with the Tax Office and stated that he was not aware of any evidence of undue legal action. Most complaints received by him were based on a debtor's lack of awareness about the debt collection process—for example, they perceived reminder letters as threats.
6.10 Other views raised in submissions are discussed below.
6.11 The Tax Office states that it seeks to be flexible in the terms and conditions offered to those businesses that were facing difficulties in paying their tax obligations in full by the due date. This may take the form of agreeing to nominal repayments in times of a business's low cash flow.
6.12 The Tax Office also states that it aims to keep taxpayers 'engaged in the system'. This means that it seeks to encourage taxpayers to maintain compliant behaviours, such as contacting the Tax Office if there are difficulties in making payments.
6.13 Further, the Tax Office also states that it ensures that it checks that the business has been afforded every opportunity to negotiate repayment—including Tax Office-initiated contact—before initiating legal action to recover amounts.
Media perception not shared
6.14 Representatives for small businesses perceive that there is growing media coverage indicating that the Tax Office is uncompromising when recovering debt, may be unnecessarily harsh and is trying to catch out small businesses rather than assisting them.41
6.15 With the exception of those involved in mass-marketed schemes and isolated cases brought to the Inspector-General's attention, representatives for small business, the accounting, tax practitioner and legal professions all agree that the Tax Office is flexible in its approach to collecting debt from the small business sector.
6.16 However, parties disagree on whether this approach should be supported.
Some support for Tax Office approach …
6.17 With the exception of those representing mass-marketed scheme investors, representatives for small businesses state that the Tax Office is generally sympathetic and accommodates the needs of individual small businesses and that the Tax Office's processes for collecting debt generally reflect the circumstances of business.
6.18 Most representatives comment that so long as a business is willing to discuss its circumstances with the Tax Office, it would generally be treated reasonably and a suitable arrangement could be brokered which enabled the business sufficient opportunity to trade out of its debt with the Tax Office. However, they did comment that the Tax Office's approach could be improved through an increased understanding of small business needs.
6.19 Tax practitioners also observe that, with the exception of isolated and rare cases, the Tax Office adopts a conciliatory approach towards small businesses. In support of this view, a tax practitioner body comments that it has not heard complaints from its members in relation to the Tax Office's debt collection activities in the last five to six years.
However, tax practitioners divided on support
6.20 Tax practitioners appear divided over whether to support the Tax Office's flexible approach to debt collection. A significant sector of tax practitioners, especially those who advise small business clients, support the Tax Office's 'soft' approach. They comment that this approach was appreciated given the recent significant changes to the tax system with the introduction of The New Tax System.
6.21 The tax practitioners generally advising the larger businesses of the small business sector express concerns about the Tax Office's 'soft' approach. They comment that the Tax Office appears reluctant to collect small debt and offers initial payment arrangements that are far too generous. They argue that the full effect of the Tax Office's 'soft' approach is masked by the recent good economic environment. Given the 25 per cent increase of collectable debt in the 2002-03 year they see no systemic changes in the Tax Office's approach to stem this trend and feel that the level of collectable debt would continue to rise significantly and would harshly affect small businesses' exposure to tax debts when the economic conditions change.
6.22 Insolvency practitioners argue that in certain circumstances the Tax Office's flexibility is not a good thing for the business community generally.
6.23 They point to circumstances where small businesses are unable to determine adequately their own viability and rectify loss-making activities. In these circumstances, they state that the Tax Office's flexibility exacerbates the business's downward slide towards insolvency and that although it wants to be treated like any other creditor it is not acting like any other creditor—for example, providing access to funds where other creditors would request a personal guarantee from the proprietor.
6.24 These practitioners also point to the broader effects on the business community: loss-making businesses are able to trade longer on Tax Office-supplied credit and therefore increase other creditors'—usually other small businesses'—exposure to loss. Additionally, this continuing trade has an inequitable effect on competitors of the business who are likely fully compliant with their tax obligations.
6.25 Insolvency practitioners did concede that their experience was not representative of all small businesses. They only saw those businesses likely to be in financial difficulty. However, they indicated that the Tax Office could be taking a more considered approach in relation to those small business collectable debt cases with larger debts such as those of over $100,000. On figures supplied by the Tax Office, approximately 7000 small businesses owe more than $100,000 each.
6.26 A common comment in submissions is that the Tax Office is not 'commercial' in its debt collection activities. The reasons underlying this comment are varied.
Underlying causes of small business collectable tax debts
6.27 The lack of commerciality on the part of the Tax Office was expressed to include a lack of adequate understanding of the reasons why a small business gets into debt with the Tax Office and other creditors. Representatives for small businesses and tax practitioners state that the factors that influence the small business sector's compliance with tax payment obligations—outlined in Chapter 2—contribute to the reasons why a small business accrues a collectable debt.
Failure to make provision for debts
6.28 All parties generally agree that a major cause for small business collectable debt was the failure to make provision for tax debts. This is either because the business does not realise how much it would be liable to pay or because cash flow is tight and the Tax Office is the only institution willing to provide the business with credit. However, a representative for small businesses points out that a business will generally not fall into debt with the Tax Office where the business uses accounting software that automatically calculates the Business Activity Statement item entries and the business does not use the monies it puts aside for future tax liabilities.
6.29 Parties were divided on what could be done to help businesses make provision for tax debts and whether the Tax Office's actions (such as audit activity retrospectively adjusting prior year claims) or inaction (such as delay in chasing up the small business for the debt) contributed to this behaviour.
Tax Office's initial educative approach
6.30 There is a general perception that the level of small business collectable debt can be attributed to the Tax Office's educative approach in implementing The New Tax System during the first couple of years from inception on 1 July 2000.42
6.31 The reasoning is generally that during this period Tax Office resources were diverted from compliance activities to educating small businesses. Now recently refocused compliance activities have found a history of non-compliant behaviour which, when corrected, results in the raising of debts covering periods going back to 1 July 2000—four years ago. To support this argument further, insolvency practitioners state that they are seeing an increasing amount of potentially insolvent businesses, mainly one-person enterprises, with unascertained tax debts because the business has not lodged activity statements over the last few years.
6.32 The Tax Office disputes this argument and states that it has maintained its compliance activities throughout the implementation of The New Tax System. It indicates that the perception could be as a result of a mixture of confusion over the Commissioner's undertaking not to use information that officers came across in education activities for the purpose of compliance action and the fact that the small business sector is now remitting more tax than ever before.
6.33 However, in an interview with Inspector-General staff, senior tax officials stated that the 25 per cent increase in collectable debt for the 2002-03 year was due to a backlog of activity statements being lodged. The Tax Office refused to provide reasons for the increase in collectable debt over the 2003-04 year. The Tax Office was unable to determine whether lodgment of multiple and outstanding activity statements by businesses was as a result of its audit and enforcement activities.
Tax Office conduct
6.34 Small businesses and their representatives state that the Tax Office allows debts to accumulate and then takes recovery action at a later date without notice. Also they comment that Tax Office errors, such as crediting payments against wrong Tax Office accounts, may contribute to small businesses accruing debts. They point to the financial strain that the Tax Office's approach had on small business. Businesses with limited cash flow were liable not only for the outstanding tax but additional penalties and the general interest charge (GIC).
6.35 The Tax Office advises that it cannot determine the GIC component of those collectable debts incurred by businesses which continue to trade:
The Tax Office's accounting system operates on a running account balance account. Liabilities are posted and credits (payments) are applied to the balance of the account rather than matched to individual liabilities. Categories of primary tax, interest and penalty amounts cannot be readily identified.
6.36 Some tax practitioners argue that collectable debt can also be attributed to the time lag (between entrepreneurial activities giving rise to a future tax liability and the lodgment of forms leading to an assessment of tax liability) and the fact that 50 per cent of small businesses lodge their own Business Activity Statements and therefore get advice from their tax practitioner at the time of preparation of annual income tax returns Therefore, they recommend, the Tax Office needs to be more proactive in relation to these types of small businesses.
6.37 In 1997, the Auditor-General recommended that the Tax Office conduct research into the causes of outstanding debt.43 In 2000, the Tax Office reported that implementation of that recommendation was in progress:
The ATO has initiated a wide range of research projects and strategies including specialised research projects into classes of like debtors, and other research into debtor population. This was conducted using the risk profiling neural net algorithms, predictive analytic research undertaken with the ABS, the use of specialised risk-focused work analysis software such as the On-Line Analytic Processing (OLAP) facility, and the ATO's in-house research facility the Kdnet.44
6.38 The Tax Office has identified some systemic reasons for payment arrangement default. It identified payment instalments coinciding with quarterly Business Activity Statement payments and the second and third payment of an arrangement as areas of higher risk of non-payment. They also identified a culture within certain groups of debtors that enter serial payment arrangements but consistently fail to pay instalments.
6.39 The Tax Office has trialled staff monitoring high-risk payment arrangement cases on an ongoing basis. They found improved compliance. They attribute this to the improved rapport between staff and debtors and the signal being sent to serial defaulters that they will deal with the same case officer in the event of default. The Tax Office states that this system, however, is resource-intensive and unlikely to become a national practice.
6.40 The Tax Office did not point to other work done to understand the causes of tax debts.
6.41 In the Compliance Strategy 2004-05, the Tax Office points to activities it sees as improving small businesses' compliance with their payment obligations. With the exception of the small business debt initiative involving structured repayment arrangements, these measures are the current Tax Office approach.
Appreciating the pressures faced by small business
6.42 Accountants and representatives for small businesses suggest that in determining how a small business debt collection matter is to proceed, the Tax Office does not adequately understand the pressures being faced by small business taxpayers.
6.43 A taxpayer representative body submits that the Tax Office has no regard to the timeliness or negative effects upon a taxpayer of delays to enquiries and requests for information. They also submit that tax officials have poor commercial knowledge and ability and that their attitude does not support a business.
6.44 They argue that the Tax Office, through its debt collection policies and practices, has failed to recognise that a business that continues to trade may have a better chance of paying off its debts and more taxes into the future than one that is prematurely forced to stop trading.
6.45 It has also been stressed by a number of practitioners that it is important that the Tax Office do more to remain in touch with the realities of small businesses. This could be achieved through consultation and an expansion of the form of assistance provided by the Tax Office to small business taxpayers identified as having difficulties meeting their tax obligations.
6.46 Another concern raised by a number of stakeholders including accountants, tax agents, legal practitioners and small business taxpayers is that the Tax Office appears to have adopted a process-driven approach in managing its debt collection cases as opposed to one focused on achieving an appropriate outcome in the circumstances.
6.47 Submissions raise many suggested solutions. However, representatives for small businesses counsel caution as these solutions may 'throw the baby out with the bath water'. They recommend further research into the potential for these solutions to improve tax administration.
Increased small business training
6.48 Some tax practitioners assert that notwithstanding the Tax Office's initial education focus when implementing The New Tax System, small businesses have faced an increased burden without a corresponding increase in training. Given that many new small businesses are entering the tax system—small businesses account for more than 90 per cent of the 600,000 annual new registrants for an Australian Business Number—they argue that the Government should provide the funds for training, that the training be provided by either government bodies or peak organisations, and that any costs would be offset by reduced levels of collectable debt and compliance resourcing. Accountants suggest that this training should assist the small business community to manage cash flow and funding of tax debt. They consider that such a measure would go some way toward addressing the systemic problem that exists.
6.49 Representatives for small business comment that this proposal may have merit, and opportunities to tailor existing training programs for small businesses could be examined.
6.50 Most submissions propose that the Tax Office have more well-trained staff to encourage debtors to come forward with problems they may be having in meeting their tax obligations. This could be similar to the assistance provided to taxpayers with the introduction of The New Tax System and involving seminars to educate small business on their responsibilities under the tax laws and how to manage cash flows better.
6.51 The Tax Office states that it already provides education to small businesses through the form of BizStart seminars and record keeping products. Further, the Tax Office states that it is not its role to educate small businesses in how to manage their business.
6.52 Some tax practitioners and commercial debt recovery agents agree that one cause of small business collectable debt was that some businesses ignore paying the debt for some time until it amounts to an unmanageable amount. In these cases, tax practitioners observe that proprietors feel they are unable to approach the Tax Office to negotiate. They say that providing periodic amnesties would help to reduce collectable debt as small businesses would feel more inclined to approach the Tax Office. They were of the view that a 'one-off' amnesty would only help to reduce currently existing collectable debt and not address the underlying problem of small businesses' reluctance to approach the Tax Office where a debt is unmanageable.
6.53 They were also of the view that the Tax Office's current small business debt assistance initiative was such an amnesty. This initiative is discussed further in Chapter 7.
Increasing frequency of payments
6.54 Tax practitioners also suggest that because, in their view, the failure to make provision for tax debts is due to a short-term focus on managing cash flow, non-compliant businesses should be forced to make payments more frequently to the Tax Office before a liability is raised. They point out that this does not necessarily mean that the Business Activity Statement needs to be lodged more frequently, only that payments be made more often.
6.55 Amounts to pay could be estimated either on an industry average basis, on the same lines as the Commissioner's amount on quarterly Business Activity Statements, or as a percentage of either of the former.
6.56 Tax practitioners for the smaller of the small business sector suggest that improved payment methods would reduce small business collectable debt. They suggest that the Tax Office extend its taxi industry payment card arrangements to all micro-businesses. This card effectively allows businesses to make payments of any amounts at any Australia Post outlet. These practitioners rejected the idea of direct debit or Electronic Funds Transfer (EFT) payments for those small businesses that did not take up these payment methods as part of their business practices.
6.57 Representatives for small businesses indicate that this option is worth exploring further.
6.58 One tax practitioner was of the view that most small business proprietors were not really business owners but 'self-employed' and therefore should have tax deducted at source in much the same way as in the old Prescribed Payments System and reconciled on lodgment of the Business Activity Statement.
Exposing business proprietors to personal liability
6.59 Insolvency practitioners and tax practitioners observe that small businesses with significant collectable debts are more motivated to take steps to resolve the debt where the proprietors are exposed to potential personal liability for the debt. They observe increased motivation where the Tax Office serve Director Penalty Notices on directors. Also they observe increased motivation where commercial creditors pursue avenues involving a proprietor's personal liability for the business's debts. They recommend that the Tax Office seek personal guarantees.
6.60 However, one tax practitioner comments that the Tax Office effectively does this where the directors have been served Director Penalty Notices and the director loans funds to the company to repay their personal liability. In these circumstances, the Tax Office allocates those funds across all the debts.
Discount on primary tax amounts for pre-payments
6.61 It was brought to the attention of the Inspector-General that New Zealand was considering a proposal to give small businesses a 6.7 per cent discount on taxes where they made voluntary payments before any liability was due in the first year of that business's trade.45 The New Zealand Government found that New Zealand small businesses were finding it hard to budget for tax payments, had their cash flows significantly affected by tax payments and generally defaulted on tax payments in the third year of trade.
Increased Tax Office training
6.62 Most submissions assert that tax officials do not understand the circumstances in which small businesses find themselves or do not have sound financial knowledge. The reasons given for this view are either because the staff appear to have poor commercial knowledge and ability or because the staff do not display an understanding of running a small business. They recommend that the either the Tax Office train its staff, employ people with business knowledge or outsource the debt collection function.
6.63 The need for the Tax Office to collect debt in a more commercial manner has also been raised in one the Tax Office's peak forums for tax practitioners, the National Tax Liaison Group, at its December 2003 meeting.46
6.64 Some taxpayer representative bodies and tax practitioners stated that in some circumstances the Tax Office treats small businesses as 'tax cheats'. They indicate that veiled threats have also been used in negotiating arrangements to recover debt—for example, if payment is not made the business will be targeted for future audit action.
6.65 A tax practitioner explained that the Tax Office views 'messy' commercial arrangements as an indicator of deliberate non-compliant behaviour. However, commercial arrangements with small businesses may not be 'clean cut' for many reasons. Although there are some arrangements that are deliberately structured to sit on the cutting edge of tax planning, tax practitioners state that this is rare because the existence of a 'messy' arrangement is generally an indication of either not obtaining or not following quality advice in the first place.
6.66 The Tax Office advises that it has delivered 'specialised debt collection techniques skilling' to 2,000 of its debt collection staff in the last 18 months. There is no specific skilling or training on awareness of small business circumstances. However, it states that this is taken into account in other training—for example, training on listening skills, determining needs and wants, learning through day-to-day work experiences, developing common sense approaches based on the circumstances presented by the taxpayer, collection skilling questions embedded in the dialogue and explaining and articulating reasons for decisions. Staff are also trained in financial skills and analysis.
6.67 The Tax Office notes that small businesses are one of the many types of taxpayers with a debt. It also poses the question of whether focusing on small business would be equitable to other types of taxpayers.
6.68 Further, the Tax Office is of the view that concerns expressed to it of its 'lack of commerciality' were from disgruntled taxpayers who did not get the decision they wanted. However, the Tax Office does acknowledge that in certain circumstances the taxpayer may not fully understand the Tax Office's position and the reasons why it has adopted such a position.47
Outsource debt collection functions
6.69 In 2003, the Tax Office contracted Ledlin Partners, business and commercial lawyers, to review a number of debt collection practices in the Tax Office. Ledlin Partners provided their final report to the Tax Office in March 2003. They commented that:
… it is worthwhile that outsourcing remain on the ATO agenda.
6.70 They recommended that:
… a 'watching brief' be developed for the [American proposal to outsource some of the American Internal Revenue Service's debt collection function] and its effectiveness be re-visited in 12 months.48
6.71 The Tax Office accepted this recommendation and stated:
As this report acknowledges, the Tax Office has considered outsourcing possibilities in the past and will continue to do so on the basis of effectiveness. However, any proposal would need to be consistent with the Tax Office's responsibilities to the community. The ATO would remain accountable for tax debt and the manner in which it is managed, irrespective of who actually does this.49
6.72 Commercial debt recovery agents point to other circumstances where Commonwealth bodies have outsourced part of their debt collection function to commercial debt recovery agents for several years. In these circumstances, the body's responsibility to the community was able to be protected by tailoring commercial recovery processes. In particular, these processes included in the agent's performance indicators a measure of its sensitivity to the circumstances of the particular classes of debtors from which amounts were recovered.
6.73 The Tax Office indicates that any trials to outsource debt collection functions will not be considered before the implementation of its 'Change Program'. Implementation is not expected to be complete before December 2008.
Improve access to better quality decisions
6.74 Accountants, tax agents and representatives of legal practitioners all express the view that the Tax Office appears to have a 'one size fits all' approach to debt collection. It is only where the debtor's representatives are able to escalate the issue to more senior tax officers that they feel they are able to get a better quality decision. It has been their experience that when dealing with tax officers at higher levels the circumstances of the debtor are adequately considered and there can be some deviation from lower level officers' strict application of the ATO receivables policy.
6.75 For example, accountants and representatives of legal practitioners state that small business taxpayers, particularly micro-businesses, are in a unique situation in relation to payment of tax liabilities. They comment that small business taxpayers do not have that same access to information or access to higher level officers within the Tax Office to provide assistance to them when they are having difficulties paying their tax debts. They also compare small business taxpayers' circumstances to other types of taxpayers' circumstances. Salary and wage earners have tax deducted at source. Large businesses are better able to afford advisers, accountants or lawyers to handle their tax affairs. Therefore, they conclude, unlike salary and wage earners and large businesses, small business taxpayers require a great deal more assistance from the Tax Office in ensuring that they are able to pay their outstanding tax debts.
6.76 As such, a number of accountants and legal practitioners suggest that tax officials managing debt collection cases not only need training in understanding small business pressures but also in how to identify cases for escalation to get a better quality decision. Also, they state that staff need to acknowledge the complexity of the laws and the lack of taxpayer understanding.
6.77 Legal practitioners submit that the Tax Office should consider engaging either staff that have extensive experience in the private sector such as legal practitioners who have acted for mercantile agents and are familiar with 'both sides of the equation' or staff that have worked for private mercantile agents.
Action to focus proprietor on viability
6.78 Insolvency practitioners, accountants and tax practitioners express the view that, through the management of debt collection cases, the Tax Office needs to ensure that small business taxpayers are made to focus on outstanding tax debts. They argue that this needs to involve requiring the debtor to consider the financial position of the business at the first sign of trouble and seek independent advice if necessary.
6.79 Accountants, tax practitioners and a legal practitioner specialising in debt recovery express the view that the Tax Office needs to be more proactive in how it manages debt collection cases. As part of the management of debt collection cases they suggest that the Tax Office should ensure that it incorporates in its practices the discipline of having small business people understand their business. They submit that the Tax Office has to get away from the idea that collecting outstanding debts is simply a matter of issuing a demand and then rote application of legal process. Rather, it should be able and willing to communicate with taxpayers and encourage them to enter into reasonable and binding instalment arrangements if they are not able to pay the full amount at once. However, they stress that such a response on the part of the Tax Office needs to be timely and commercial. The aim should be to motivate and assist debtors to pay the debt by focusing the debtor's attention on payment.
6.80 They suggest that the Tax Office could do more to assist small business debtors who are having difficulties meeting their tax obligations.
6.81 For example, they propose that the Tax Office could approach a number of targeted businesses with large debts, based on industry and risk, and assist them in focusing on their debt problems. Such focus could involve members of the insolvency profession going out to targeted businesses and discussing their financial state. This would be followed by the debtor seeking professional advice regarding their financial position and an action plan being developed to assist the small business to meet its outstanding tax obligations. Depending upon the level of cooperation demonstrated by the debtor in dealing with the outstanding tax debt, part of that action plan could involve extended payment arrangements, temporarily writing off part of tax debts or possibly even the compromise of outstanding tax debts. This approach is similar to the approach adopted by the Australian Securities and Investment Commission in its National Insolvency Project.
6.82 Tax practitioners who advise small businesses comment that this proposal is directed towards the cases in higher debt levels and that if it were applied to the lower debt levels it may 'force businesses underground'.
6.83 The Tax Office states that it is not its role to determine the viability of small businesses or assist small businesses in this activity. Further it points to statistics which show that in 60 per cent of collectable debt cases debtors pay immediately after receiving the first reminder letter.
6.84 However, tax practitioners state that the reminder notice only works where a debtor has forgotten to pay and that no response after that first letter should indicate to the Tax Office that the small business is seeking to avoid contact with the Tax Office. In any event, they are of the view that the Tax Office should act to focus small businesses on their debts by commencing legal action within 90 days of the debt becoming outstanding.
6.85 Representatives for small businesses comment that a time threshold, to the exclusion of other triggers, is not an appropriate criterion to commence legal action.
6.86 Small businesses, tax practitioners and representatives for small business, accountants and taxpayers state that the Tax Office needs to improve its communication with small business over their debts. They perceive a lack of early, effective and sufficient communication, especially in relation to small businesses who lodge their own Business Activity Statements.
6.87 However, tax practitioners state that they still field many queries from their clients who need assistance in understanding their Tax Office statements—for example, not understanding how entries on different statements in relation to the income tax account and the integrated account interact.
6.88 The Tax Office states that it sends statements of account to taxpayers on a periodic basis and reminder notices and interest notices where a debt is outstanding. Also, small businesses could now access their accounts online via the business portal. It states that in any event, a small business self-assesses its liability and therefore knows before the Tax Office what amount of tax liability will need to be paid.
6.89 Additionally, the Tax Office is trialling an early payment reminder letter that is issued to the taxpayer before their debt is due and payable. It targets those in higher risk areas, including those who did not pay on time the previous year. It advises that for the 2 March 2004 due date, 133,000 letters were sent during 12 to 20 February 2004. For the 31 March 2004 period, 4,000 letters were sent on 18 February 2004. The Tax Office has not referred the Inspector-General to the results of this trial.
6.90 However, accountants say that statements of accounts are sent out on an ad hoc basis and that despite the public release of the business portal there is no widespread awareness of its existence.
Distinguishing wilful non-compliance from difficulty to pay
6.91 Most private sector submissions agree that, in appropriate circumstances, the Tax Office should be flexible in how it seeks to recover debts from small businesses. However, all express concerns that the Tax Office does not sufficiently distinguish those businesses that want to pay their debt but have difficulty in doing so from those businesses that could pay but do not. They are of the view that those who are wilfully non-compliant should not be able to take advantage of the Tax Office's flexibility.
6.92 This inability to determine sufficiently whether a business is wilfully non-compliant or just in financial difficulty appears to affect detrimentally private stakeholders' perceptions of the fairness and equity of the Tax Office's debt collection practices.
6.93 Commercial debt recovery agents comment that the Tax Office could do more to 'protect everyone from tax predators' by being more 'commercial' or timely in its debt recovery function, resulting in fewer creditors suffering.
6.94 Others, such as insolvency practitioners, have expressed a concern that notwithstanding a business representing a risk to revenue, the business is afforded much flexibility by the Tax Office and allowed to enter into a payment arrangement when in fact more coercive action is required.
6.95 The Tax Office states that it 'errs on the side of the taxpayer' when deciding what recovery action to take in relation to a small business debtor. It also states that to be able to distinguish between these two types of taxpayers would require an assessment of the business's financial position. They state that this would mean that the business would need to supply either the Tax Office or an insolvency practitioner with a wealth of financial information. This would significantly increase a small business's compliance costs and distract the business from pursuing entrepreneurial activities.
6.96 Additionally, the Tax Office stated that it had done some work on assessing a business's likelihood of ultimate non-payment by looking at the coincidence of historical information, and implemented this into its IT system Net Risk. However and although the Net Risk system is 'switched on', this capability is not being used by the Tax Office.
Better coordination with ASIC
6.97 In discussions with the National Insolvency Coordination Unit (NICU) of the Australian Investments and Securities Commission (ASIC), a number of concerns regarding the actions of the Tax Office on the work of the NICU were raised with the Inspector-General.
6.98 Firstly, it was suggested that the Tax Office only seems to focus on the debtor entity without appreciating the other associated entities in the group and how the debtor is interacting with those other entities.
6.99 Secondly, it was suggested that there needs to be a better and less restricted flow of information between ASIC and the Tax Office. This could involve ASIC passing over information to the Tax Office regarding debtors that ASIC identifies as potentially insolvent because of significant tax debts. Alternatively, it could involve the Tax Office identifying debtors for review by ASIC where there is information indicating that the directors of a debtor company may be in breach of their duties. Also the sharing of information between agencies in respect of possible phoenix companies could allow a more strategic approach to be adopted.
6.100 Thirdly, ASIC indicated that in some instances where the company is being reviewed, the Tax Office has been too lenient in allowing such a company to enter into a payment arrangement without a proper assessment of the company's capacity to pay.
Better coordination of relief measures
6.101 Concerns have also been expressed by a taxpayer representative body that the Tax Office does not have a coordinated approach in its application of the relief measures where taxpayers are having difficulty meeting their taxation obligations. It has suggested that a taxpayer needs to make separate applications for the various forms of available relief, for example, relief due to serious hardship and remission of the GIC applications, to allow payment by instalments and compromise of the debt. It suggests that the Tax Office needs to take a more global or 'whole-of-client' approach when considering whether relief is appropriate.
6.102 Where appropriate, this could involve applying the various forms of relief simultaneously to an application by a debtor. For example, it has been suggested that measures such as partial write-off or partial compromise can be considered together with a partial remission of GIC. This would allow a viable small business debtor that is having difficulties meeting its taxation obligations due to unforeseen business circumstances to make partial payments of tax while continuing to trade.
6.103 In a comment echoed by many tax practitioners, accountants and lawyers, a taxpayer representative body stated that:
The ATO implementation of any small business debt collection policy that may be favourable to a taxpayer is haphazard and inconsistent.
6.104 Tax practitioners comment that the Tax Office's actions appear 'arbitrary' and may be one of the reasons for small business sector collectable debts. Also, that the Tax Office does not respond consistently to defaulters or appear to consider businesses' compliance history, whether good or poor. Similar comments were made by the Senate Economics Committee in 2001 in relation to the Tax Office's recovering debt from participants in mass market tax effective investments:
… the Committee is of the view that, at the very least, there seems to be a significant gap between the ATO's stated policy and its implementation by regional offices.50
6.105 One tax practitioner provides an example of, on the one hand, the Tax Office suing one client for recovery of $1000. On the other hand, the Tax Office does not attempt to contact another client who has owed the Tax Office over $250,000 for over a year.
6.106 Tax practitioners urge the Tax Office to enforce payment obligations uniformly and consistently.
Consistency between Tax Office sites
6.107 Legal practitioners and accountants indicate that in certain instances, the debt collection matter will be handled in a different state to that where the taxpayer is located. This echoes comments made by the Auditor-General in 1997 before the Tax Office publicly released the ATO receivables policy.51 They suggest that this can sometimes lead to a tax officer not having an awareness or understanding of the circumstances facing the business. One view expressed was that systems and work practices should be state-based with, for example, New South Wales debtors being handled by staff located in New South Wales.
6.108 Accountants state that there is evidence of different approaches being taken by different offices and they perceive that it is all a matter of whom you talk to in terms of the likely outcome. They comment that clearer debt collection guidelines are required, with well-defined time lines and outcomes so as to promote a consistent quality control of delivery.
6.109 Accountants recommend that these guidelines be developed in consultation with practitioners and the small business community. They point to the need for effective communication of those guidelines to the small business community and practitioners so as to create certainty in expectation of how the Tax Office will manage debt collection. This would be achieved through practitioners and taxpayers having clear knowledge of critical and milestone events, where if the debtor does not meet these or make alternative arrangements they will be subject to certain Tax Office actions.
6.110 Representatives for small businesses raised another concern that in certain instances a decision by a tax officer in a regional office is disregarded if the issue becomes the focus of Tax Office scrutiny. For example, for a class of taxpayers being handled out of a regional office, a decision by a tax officer to accept a payment arrangement was not honoured when the cases became a Tax Office project and managed out of another Tax Office site.
6.111 The Tax Office states that it has a comprehensive quality assurance process which provides assurance that the quality of decisions and judgments exercised are consistent. Additionally, it states that by August 2004 all staff involved in technical decision-making in the debt collection function will have received training. The Tax Office states that the technical quality review process has not identified any systemic problems in the written advice given in the course of collecting debt.
6.112 Tax practitioners state that notwithstanding the Tax Office's quality assurance processes, they encounter inconsistent Tax Office approaches on a frequent basis.
Certainty and transparency
Transparency in management of debt collection cases
6.113 Accountants and tax practitioners express concerns that, at times, it is unclear where a particular debt collection case is in the debt recovery process. They state that there are usually periods of inaction on the part of the Tax Office in the collection of debts followed by sudden actioning. They indicate that this is especially relevant where the Tax Office seeks to take more coercive legal recovery action, such as issuing a garnishee notice or initiating bankruptcy or liquidation action.
6.114 Accountants and tax practitioners comment that they do not have a clear understanding of how a debt collection case will be handled by the Tax Office if the debt remains outstanding. They point out that, given this uncertainty as to how a debt collection case will be managed, it is difficult to advise clients on the Tax Office's likely course of action. Rather, they are only able to provide clients with general information of the consequences of failing to pay the debt on time, such as the imposition of interest and the possibility that legal action may be initiated. They also perceive that where the Tax Office does follow up a case there is no consistent pattern of approach. This point is echoed by taxpayer representatives. They state that more transparency would import a more equitable approach which would enable the market to make decisions on a better quality of information.
6.115 Tax practitioner representative bodies also express concerns with the transparency of the Tax Office's management of debt collection cases. They submit that it is difficult to determine how the Tax Office will pursue collection of an outstanding debt in particular circumstances. They indicate that the small business experience with the Tax Office in its debt collection has varied between two extremes, ranging from being quite flexible and entering into a payment arrangement to immediate legal action. They comment that this gives mixed signals to the private sector.
6.116 The Tax Office states that it has limited resources to target debt collection. It finalises 1.6 million debt cases per year and it only has approximately 3100 staff to manage both debt collection activities and lodgment activities. Although a majority of taxpayers voluntarily meet their payment obligations there are not enough staff to contact each taxpayer who has not paid on time. Therefore they target those cases identified as a higher risk.
6.117 Also, concerns have been expressed by accountants and tax agents about the handling of a debt collection matter when it is to be escalated for further actioning. Accountants and tax agents suggest that more information should be provided to them on where the matter will be escalated for actioning if the debt is not paid.
6.118 This, they submit, is required if the Tax Office is not able to specify with greater clarity and detail how it will pursue collection of an outstanding debt. Such information could be provided by way of letter or email and will be an indication to the debtor that the Tax Office is about to escalate the case for further actioning. They argue that this may focus the debtor on the outstanding debt and be a catalyst for some to seek advice on the viability of the business. Insolvency practitioners indicate that, once legal action is commenced with the issuing of formal notices, debtors are more likely to consult a solicitor, who is unlikely to be skilled to provide advice on viability, rather than their accountant or business adviser.
6.119 Commercial debt collection agents also comment that they have a better recovery rate where the debtor is aware that their debt is about to be escalated to another area for recovery action.
6.120 Insolvency and tax practitioners commented that, notwithstanding its flexibility, the Tax Office was not timely in its recovery of debt. They stated that they continue to see the Tax Office as a significant creditor in almost all the businesses they come across in the course of their work. They comment that the Tax Office has given these businesses too long to trade out of their difficulties and allowed debts to accumulate to large levels.
6.121 7.121 The Taxation Ombudsman comments also echo these concerns:
If tax complaints to this office suggest anything, it is that the ATO is sometimes too slow to take more formal recovery action against some small business tax debtors. The situation is particularly evident in the case of superannuation guarantee complaints (from concerned employees), where there has in the past been evidence of ongoing delays in the ATO's pursuit of employers for unpaid superannuation contributions, and complaints from some small businesses that have over time allowed their tax debts to become so large that there seems little option other than bankruptcy or liquidation. Our investigation of superannuation guarantee complaints has also indicated that, where a small business has a superannuation guarantee liability, it is not uncommon that the business will have other tax debts as well (unpaid income tax, PAYG withholding or group tax, and GST)..52
6.122 Commercial debt recovery agents point to research which demonstrates that the longer a debt is left outstanding the less likely that the debt will be recovered.
6.123 The Tax Office states that it has limited resources to manage 1.6 million debt cases a year. Therefore, it concludes that it must direct its resources to those cases of higher risk of non-payment. It also comments that, due to the taxes it collects and the nature of the Tax Office as a creditor, it will always feature as one of the largest creditors. The Tax Office states that, unlike other unsecured creditors whose exposure to bad debts can be minimised by refusing to trade with debtors, the Tax Office cannot choose whom it deals with.
6.124 Further, the Tax Office indicates that the small business community has not raised its timeliness of recovery action with the Tax Office as a significant issue of concern.
6.125 However, tax practitioners point to a significant number of cases in the lower debt levels where no action, other than issuing automatically generated reminder letters, has been taken. They state that based on this inaction a general perception in the tax profession and small business sectors has arisen that the Tax Office is a very lenient creditor where debts stay under a certain threshold.
6.126 The Tax Office has since stated that for those who are offered payment arrangement terms under the small business debt initiative but do not accept them, they:
will face firm action, which may include legal proceedings or recovery of the debt from their bank accounts or other income sources.53
6.127 Further discussion of this initiative is outlined in Chapter 7.
6.128 Further discussion of the lack of timeliness in relation to commencing legal action is outlined in Chapter 8.
39 Taxation Ombudsman, written submission, 25 May 2004, p. 1.
40 Commonwealth Ombudsman, Annual Report 2002-03, Canberra, July 2003, pp. 36-50.
41 See for example—'Number of failing businesses to rise', Sydney Morning Herald, 23 January 2004, Internet article; 'Will the taxman send you broke?', Business Review Weekly, 29 January 2004, pp. 47-51; and 'Crackdown under way', Business Review Weekly, 11 March 2004.
42 See Commissioner of Taxation, speech to the Chartered Accountants in Business (CABs) Congress '98, 'A New Tax System—Changing Cultures', Sydney, 19 November 1998.
43 Australian National Audit Office, Audit Report number 13 of 1996-1997: Tax Debt Collection, 18 November 1996, recommendation 1.
44 Australian National Audit Office, Audit Report number 23 of 1999-2000: The Management of Tax Debt Collection, 20 December 1999, p. 121.
45 New Zealand Government, Making it easier for small businesses: A government discussion document, September 2003, http://www.taxpolicy.ird.govt.nz/publications/files/html/ makingtaxeasier/ viewed on 4 May 2004.
46 Australian Taxation Office, NTLG Minutes of 3 December 2003, 1 June 2004, http://www.ato.gov.au/print.asp?doc=/content/44415.htm viewed on 24 August 2004.
48 Australian Taxation Office, Australian Taxation Office response to the Ledlin report, September 2003, http://www.ato.gov.au/print.asp?doc=/content/37886.htm viewed on 24 August 2004.
50 Senate Economics References Committee, Inquiry into mass marketed tax effective schemes and investor protection—interim report, June 2001, p. 48.
51 Australian National Audit Office, Audit Report number 13 of 1996-1997: Tax Debt Collection, 18 November 1996, paragraph 23.
52 Taxation Ombudsman, written submission, 25 May 2004, p. 1.