Introduction

8.1 The terms of reference for this review do not explicitly mention the Tax Office's legal recovery action. However, one focus of the review is on whether the Commissioner's policies and practices unnecessarily force small businesses into either bankruptcy or liquidation. In effect, this focus invites the Inspector-General to consider the effect of the Tax Office's legal recovery action leading up to and related to either the bankruptcy or liquidation of a small business. Submissions expressed a range of views on this issue. This chapter outlines those views.

Background

8.2 Where tax debts are not paid by the due date and remain outstanding, the tax laws provide that they become a debt due to the Commonwealth.61 They also provide that the Commissioner has the authority to recover those debts in any court of competent jurisdiction.

8.3 Legal action is said to involve the use of the Commissioner's coercive powers under the Taxation Administration Act 1953 (TAA 1953), such as:

  • issuing a garnishee notice;
  • issuing a director's penalty notice for unremitted Pay As You Go amounts; and
  • initiating bankruptcy or winding-up (leading to liquidation) proceedings.

8.4 The type of legal action undertaken is determined by a range of matters including the type of debtor legal entity.

8.5 The final legislative sanction for debtors that do not pay or enter into an arrangement to pay by instalments is the sequestration of an individual's estate in bankruptcy or the liquidation of a corporate debtor.

8.6 The Tax Office indicates that bankruptcy or liquidation will normally be pursued only after other recovery actions have been taken and proven unsuccessful. This would include instances where the debtor has not taken steps to advise the Tax Office of an inability to pay and does not put forward an acceptable proposal to pay the debt by instalments.

8.7 The ATO receivables policy also states that the Commissioner or a Deputy Commissioner may institute legal recovery proceedings, but may adjourn those proceedings where the debtor has agreed to pay the debt, additional charges for late payment and legal costs, in full either by a specified date or by instalments over a period.

8.8 On the other hand, the ATO receivables policy provides that the Commissioner or Deputy Commissioner may see it as appropriate to continue with legal recovery proceedings notwithstanding an approach by the debtor.

8.9 Of the 22,637 bankruptcies in the 2002-03 income year there were 4103 business-related bankruptcies.62 Provisional statistics for the 2003-04 income year show that of 20,496 bankruptcies only 4055 were business-related.63

8.10 The Tax Office advises that of the approximately 1.6 million collectable tax debt cases finalised in the 2002 03 income year, they initiated legal actions in 1183 instances prompting 316 payments in full. The balance of cases resulted in 273 bankruptcy orders, 498 winding up orders and 96 voluntary administrations. The Tax Office was not able to provide figures for the 2003-04 income year. Nor was the Tax Office able to provide a break-up by market segment of the 273 bankruptcy orders or the 498 winding-up orders recorded for the 2002-03 income year.

Views

8.11 There have been a range of views expressed to the Inspector-General regarding the impact of the Tax Office's small business debt collection policies and practices and whether they unnecessarily force small businesses into either bankruptcy or liquidation.

8.12 Broadly, these views relate to how the Tax Office exercises judgment in determining when legal action should be initiated. They may be summarised as follows:

  • The Tax Office treats small businesses unnecessarily harshly.
  • There is no evidence to suggest that the Tax Office takes precipitate legal action.
  • The Tax Office acts too slowly to stop debt accumulating.
  • The Tax Office is too slow to use its additional powers.
  • The Tax Office is not consistent in its approach to legal action to recover outstanding tax debts.
  • The Tax Office's policies and practices do not promote a transparent and accountable process.
  • The Tax Office's approach to legal recovery does not strike an appropriate balance between the interests of the debtor, the creditor and the public interest.
  • The Tax Office does not take a commercial approach when voting at creditors' meetings.

8.13 These issues overlap to a large extent with issues relating to payment arrangements. This is because entering a payment arrangement effectively stops legal recovery of tax debts.

8.14 Background information on the relevant legislation and policy regarding a bankruptcy and liquidation action has been included in Chapter 4 of this document.

Overall

General perception that Tax Office treats small businesses unnecessarily harshly

8.15 During the initial scoping review which sought to identify issues for possible review, submissions and comments were received by the Inspector-General, along with media articles, that indicated that there was a general perception in the community that the Tax Office was unnecessarily harsh in its treatment of small business taxpayers. In particular, there was a perception that the Tax Office will come down hard on defaulting businesses with the initiation of bankruptcy and liquidation action.

No evidence of precipitate legal action

8.16 However, the Commonwealth body which is empowered to deal with complaints of this type of Tax Office conduct, the Taxation Ombudsman, comments that:

Certainly we have little or no evidence to suggest that the ATO is taking precipitate legal recovery action (namely bankruptcy or liquidation) against small business tax debtors. 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. This situation is particularly evident in the case of … 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.64

8.17 As to the trend of Tax Office activity in this area, information from the Insolvency and Trustee Service Australia shows that there has been an overall decrease in the number of business-related personal bankruptcies initiated by the Tax Office.

Table 8.1: Tax Office initiated business-related personal bankruptcies
Financial year Total bankruptcies
1997 387
1998 287
1999 210
2000 118
2001 98
2002 148
2003 143
2004 135

Source: Insolvency and Trustee Service Australia, 8 July 2004.

8.18 Appendix 1 provides information on the business-related personal bankruptcies in which the Tax Office was a creditor but which were not initiated by the Tax Office.

8.19 Information from the Insolvency and Trustee Service Australia also shows that, for the 2003 calendar year, the Tax Office was a creditor in 18 per cent of all bankruptcies, as opposed to banks (70 per cent), finance companies (67 per cent) and utilities (38 per cent).65

8.20 In dollar terms, tax accounted for 10 per cent of total debt while banks accounted for 29 per cent, finance companies 15 per cent and 'other' represented 44 per cent.66 Creditors identified as 'other' would include trade creditors, professional fees, medical bills, school fees and family loans.67

8.21 Regarding the characteristics of creditors entering into Debt Agreements, for the 2003 calendar year, the Tax Office was a creditor in 10 per cent of all Debt Agreements, as opposed to banks (95 per cent), finance companies (95 per cent), utilities (39 per cent), and credit unions (16 per cent).68

8.22 In dollar terms, banks and finance companies were the largest creditor groups for debts subject to a Debt Agreement, respectively owed 48 per cent and 31 per cent of the total unsecured debt with tax accounting for 3 per cent.69

8.23 Regarding the characteristics of creditors entering into Part X Agreements, for the 2003 calendar year, the Tax Office was a creditor in 53 per cent of all Part X agreements, as opposed to 'other' (89 per cent), banks (81 per cent), finance companies (70 per cent) and utilities (24 per cent).70

8.24 In dollar terms, banks and 'other' were the largest creditor groups, respectively owed 27 per cent and 54 per cent of the total unsecured debt with tax accounting for 12 per cent of the total.

8.25 Commercially available figures detail the number of Tax Office-initiated liquidation actions, which indicate an increase in the number of Tax Office-initiated liquidations over the last two years.

Table 8.2: Tax Office-initiated liquidations
  Total number of court liquidations Tax Office-initiated liquidations Percentage of Tax Office liquidations
11 July 2002 to 10 July 2003 1897 320 16.8%
11 July 2003 to 10 July 2004 2036 580 28.5%

Source: Insolvency Notices Pty Ltd.

8.26 Recent media articles suggest an increase in Tax Office legal action activity. One newspaper article suggests that business-related bankruptcies are on the rise as 'the Australian Taxation Office chases down small businesses that have failed to pay their taxes on time'.71 The article reports that while the September quarter figures from Insolvency and Trustee Service Australia showed a 1 per cent fall in the overall number of bankruptcies from the same quarter last year, business-related bankruptcies increased by 18 per cent from 931 to 1100. The article goes on to suggest that accountants expect that business-related bankruptcies will edge up as poorly managed businesses are caught up in the Tax Office's 'hard-line' on non-payment of taxes.

8.27 Another newspaper article reports that the number of companies entering voluntary administration rose by 14 per cent in the July-September quarter, against the same period last year.72 It is also reports that companies wound up as a result of a court order rose by 42 per cent after 'aggressive' action by the Tax Office to recover unpaid taxes.

8.28 One practitioner argues that the Tax Office undertakes aggressive legal action despite a business's prior payment arrangement compliance.

8.29 The Tax Office states that the number of bankruptcy and liquidations it initiates should be considered in the context of the total number of director penalty notices, section 459E notices and statements of liquidated claims that it issues. For example, the Tax Office states that it has taken bankruptcy action in approximately 880 cases since July 2003, in relation to $165 million in outstanding tax. This, it argues, represents 1.36 per cent of all bankruptcy orders for the period 1 July 2003 to 31 March 2004.

8.30 Table 8.3 below seeks to provide some greater detail on the flow of cases from the time a notice initiating legal action is issued to a taxpayer to when either bankruptcy or liquidation is initiated.

Table 8.3: Tax Office initiated legal actions and outstanding collectable debt by debt actioning
Legal action Number of notices issued/actions
initiated since July 2003 (Approximate)
Collectable debt by legal actioning
($m)
Director Penalty Notices 20,000 1,500
Garnishee Notices 4,200 400
Section 459E Notices 10,500 1,100
Statement of Liquidated Claim 7,900 500
Writ of Execution 150 10
Bankruptcy 880 165
Winding up 1,700 240

Source: Tax Office

8.31 The Tax Office has reported that there is $2.135 billion, representing 25.59 per cent of the total collectable debt, subject to advanced debt recovery action, with a total of 63,665 cases or 4.35 per cent of the total collectable debt cases. Advanced debt recovery action is defined by the Tax Office as the commencement of significant collection action including the initiation of legal action, issuing Director Penalty Notices or where relief applications have been received. Of that $2.135 billion, $773.18 million related to activity statement debt and $970.04 million related to income tax debt.

8.32 Table 8.4 below provides some greater detail regarding the amount of collectable debt subject to advanced debt recovery action by the Tax Office.

Table 8.4: Small business collectable debt by advanced debt recovery action
Value
($m)
% of total
collectable debt
by value
Cases
Total collectable debt(a) Total for all segments 2,135 25.59 63,665(b)
Micro-business segment(c)
(
Total micro 1,295 15.52 46,686
Micro debt level 4 243 2.91 7,026
Micro debt level 5 208 2.49 3,048
Micro debt level 6 466 5.59 1,727
SME segment(c)
($2 million-$10 million annual turnover)
Total SME 394 4.72 2,756
SME debt levels 4 11 0.14 321
SME debt levels 5 24 0.29 342
SME debt levels 6 150 1.80 440

(e) Information current as at 30 June 2004.

(f) Case numbers exclude credit/zero balance cases.

(g) Information current as at 13 September 2004.

Source: Tax Office

8.33 For the micro-segment approximately 35.98 per cent of the collectable debt subject to advanced debt recovery action is classified by the Tax Office as debt level 6. For the small to medium enterprise (SME) segment, 38.13 per cent of the collectable debt subject to advanced debt recovery action fell into this category. Over the last 12 months, total segment trends indicate that collectable debt subject to advanced debt recovery action has remained relatively constant.

8.34 The Tax Office has indicated that segment-specific analysis of trends by debt actioning for debt levels 4, 5 and 6 over the last 12 months is not available.

Action to stop debts accumulating

8.35 Stakeholders and practitioners are concerned with the timeliness of the Tax Office's response in initiating legal action.

8.36 For some, the concern is that the Tax Office adopts a 'soft approach' and at times is reluctant to initiate legal action and collect small business debts. A number of submissions were critical of the time taken by the Tax Office to follow up on outstanding debts. A focus group involving a number of tax practitioners was of the view that the Tax Office needs to act quickly to stop debt accumulating.

8.37 Accountants and taxpayer practitioners have indicated that the Tax Office did not have a timeframe after which it would initiate legal action. They stated that in extreme circumstances it may initiate legal action as soon as an assessment is raised, in other extremes it may never take legal action and wait for the business to lodge an activity statement or assessment and offset any credit owing.

8.38 In relation to bankruptcy, the Tax Office considers that it is a valid option for dealing with debtors and it will not hesitate to use this process in appropriate circumstances. However, the Tax Office states that the decision to initiate bankruptcy proceedings against a debtor will not be taken lightly, nor will it be taken to 'punish' a debtor.It states that the initiation of legal action is the final legislative sanction used to recover outstanding tax debts. This implies that the process of making a decision to take legal action takes time.

8.39 For some insolvency practitioners, taking a more commercial approach means that the Tax Office should act sooner to recover outstanding debt. They argue that the Tax Office should initiate legal action after 90 days unless the taxpayer has approached the Tax Office to enter into a payment arrangement. They suggest that if small businesses do not respond to the first reminder letter, the Tax Office should immediately threaten legal action. For example, depending on the circumstances, this could be issuing a garnishee notice, issuing a letter of intention to sue or actual commencement of recovery through the courts.

8.40 Insolvency practitioners also argue that any period of time beyond 120 days before the commencement of recovery action is far too long a period to wait. They argue that this timeframe is consistent with commercial practice.

8.41 A number of insolvency practitioners were of the view that small businesses in debt with the Tax Office are effectively using public monies to prop up an under-performing business and allowing it to continue trading. With the continuing trade of the debtor business, other creditors become more confident and increase the credit limit of the debtor.

8.42 They argue that if the Tax Office does not act soon enough to recover the debt, and provide some indication to other creditors that the business is having cash flow problems, the small business debtor may run up larger debts with those other creditors than would otherwise have been the case. A number of practitioners stated that when attending creditors' meetings they, and other creditors, were often astounded with the amounts indebted to the Tax Office and the time the debt had been outstanding.

8.43 Some insolvency and tax practitioners were of the view that the Tax Office should only initiate legal action sooner where the outstanding tax relates to amounts withheld from employees, such as Pay As You Go withholdings, or to amounts that should be remitted to the Tax Office, such as GST. They argue that, unlike income tax owed by the business, these amounts are held on trust by the taxpayer and they should make provision for the timely payment to the Tax Office. They argue that a business should not be using such amounts for the purposes of paying other creditors or as a means to expand the business.

Timeliness of using additional powers

8.44 A debt recovery agent was of the view that the Tax Office was slow to use the additional powers that it had been afforded by Parliament, such as the ability to issue a garnishee notice under the TAA 1953. They were also of the view that when the Tax Office did use such powers, its approach was inconsistent and lacked transparency, with the issuing of a garnishee notice being like a 'lucky-dip'.

8.45 The Tax Office states that it has issued approximately 4200 garnishee notices since July 2003, in relation to $400 million in outstanding tax. Of the 4,200 garnishee notices, the Tax Office indicates that the majority are issued because of businesses not responding to earlier opportunities to comply where the debt is escalating.

8.46 The Tax Office also states that the decision to issue a garnishee notice is a significant one and it recognises the impact it may have on a taxpayer. As such a taxpayer is notified of the issue of a garnishee notice when sent to a third party. Also, the Tax Office indicates that Chapter 12 of the ATO receivables policy covers the Commissioner's powers to recover tax debts from third parties owing money to, or holding money for, a debtor of the Tax Office and sets out the circumstances when those powers will be used.

8.47 Also a range of submissions suggest that the Tax Office should not rely on the issuing of reminder letters where tit has insufficient resources to give individual attention to cases. Rather, it should consider whether there are alternative responses that could be taken, such as providing an amnesty to pay outstanding debts or the more efficient use of the power to issue a garnishee notice.

Consistency in approach

8.48 Submissions also indicate that when the Tax Office does initiate legal action then there is a lack of consistency in its approach to the recovery of debt between taxpayers with similar debt levels and also between taxpayers with different debt levels.

8.49 For example, one submission from an accountant indicates that in certain instances the Tax Office commences recovery action for a small amount of outstanding tax debt but that no action is being taken on larger taxation debt amounts. Also, one submission from a tax practitioner provides an example (previously provided in this document) of the Tax Office commencing legal recovery for a small amount owing while not taking any action to recover a significantly larger amount owing.

8.50 In response the Tax Office states that the initiation of legal action will not always be based upon the outstanding debt level. Rather, in considering whether to initiate legal action there are a number of factors that are taken into account, including the nature of the debt, the asset position of the debtor and the risk to revenue.

8.51 Further, the Tax Office states that in order to ensure that bankruptcy action is only initiated in appropriate circumstances, the Commissioner has advised that Tax Office staff are authorised to make decisions within the boundaries of specified delegations. While staff at lower levels are able to issue a summons as a first stage in the legal process, decisions to proceed to bankrupt an individual can only be made by higher level staff.73

Transparency and accountability

8.52 The issues of transparency and accountability in relation to legal recovery action appear to be inextricably linked to the timeliness of the Tax Office's response. The issues and suggestions outlined below therefore overlap with those discussed previously.

Reasons for approach

8.53 A number of accountants and tax practitioners express some concern that there was little or no indication by the Tax Office as to why it had adopted a particular approach in recovering an outstanding debt from particular clients.

8.54 They observe that this tends to give the appearance of a 'lucky-dip' approach as to when recovery action will be taken. They submit that the Tax Office needed to provide clearer guidelines and explanations as to what approach it would take in particular circumstances so as to minimise an inconsistent approach in the recovery of debt amongst taxpayers.

8.55 According to submissions from a tax practitioner association, a tax practitioner and a small business, the Tax Office's debt collection practices vary between two extremes. On one hand the Tax Office may implement a repayment strategy, including periodical payments and payment options, without resorting to legal action. In other instances legal action is initiated by the Tax Office with little opportunity to enter into a payment arrangement.

8.56 A focus group involving accountants from a number of professional associations expressed the view that members could not identify what it is in the Tax Office that triggers off particular debt collection activities. It was said that the current Tax Office approach appeared to be random and lack consistency.

Clarity

8.57 Some practitioners suggest that this could be overcome by the Tax Office incorporating clear time lines and outcomes as part of the ATO receivables policy. These guidelines should provide clear time lines (for example, when legal action will be commenced) and outcomes with critical milestone events (for example, entering a payment arrangement). If debtors were to fail to comply with these critical and milestone events and not make contact with the Tax Office, the matter would be escalated and more coercive action would be taken within a set timeframe. They suggest that this would provide clear knowledge to taxpayers and their advisers as to what the critical and milestone events in the debt collection process are, and ensure consistent actioning by the Tax Office.

8.58 However, practitioners state that there should be widespread consultation in developing guidelines incorporating such changes, and the guidelines should be communicated to the small business community. They state that any recovery process involving the prompt initiation of formal legal recovery needs to be well-defined and transparent.

8.59 In response, the Tax Office states that it would be difficult to develop a standard debt collection process involving set time lines and critical events as the progress of each case is determined on its individual circumstances.

8.60 Furthermore, the Tax Office is of the view that to provide a time line of events and actions would promote non-compliance to the limits of the time lines set. In effect, it would provide a 'blue-print' of the Tax Office processes and responses. The Tax Office sees more compliant behaviour in an environment of uncertainty.

8.61 The Tax Office states that in any event the process for legal recovery is spelt out in its ATO receivables policy.

8.62 Broadly, Chapter 8 of the ATO receivables policy deals with the various avenues open to the Commissioner to collect outstanding taxation debts and the role of bankruptcy action within that process.

8.63 Chapters 16 and 17 specifically examine arrangements set up in accordance with Part X of the Bankruptcy Act 1966 (Part X arrangements) and agreements entered in accordance with Part IX of the Bankruptcy Act 1966 (Part IX debt agreements) respectively.

8.64 Chapter 18 examines the factors that should be considered by the Commissioner before making a decision to bankrupt an individual debtor. It also discusses situations where bankruptcy action may not be appropriate.

8.65 Finally, Chapter 19 sets out the matters the Commissioner will take into account when deciding how to vote at a meeting called by the bankrupt's trustee.

Balance between interests of creditors, debtors and the public interest

8.66 Concerns have been raised with the Inspector-General as to whether the Tax Office achieves an appropriate balance when implementing its policy to initiate legal action.

8.67 Submissions from legal practitioners specialising in debt recovery and accountants express concern that the Tax Office does not properly consider the interests of other creditors and small businesses in determining whether to initiate legal action. In particular, they argue that a soft approach can have a counter-productive effect, especially for other parties such as other creditors and competing businesses.

8.68 Some legal practitioners suggest that the Tax Office could better strike the appropriate balance between the competing interests by better using the additional legal powers afforded to it, like the power to issue a garnishee notice or a director penalty notice. They argue that, given the special circumstances in protecting the revenue, it is in the public interest that the Tax Office not only have these additional powers but also use them to ensure them in an appropriate and fair manner to ensure the balance is maintained.

Distinguishing between compliant businesses and non-compliant businesses

8.69 Small business representatives also indicate that the Tax Office's current approach is flexible and broadly sympathetic to taxpayer needs and in many cases accommodates the individual circumstances of a debtor. However, the small business representatives stress that repeat offenders are a burden on the tax system and should be dealt with accordingly, including imposing much stricter payment conditions. They also submit that in implementing stricter conditions on repeat offenders, the Tax Office should ensure that the flexibility currently offered to other small business taxpayers who are having difficulties paying should be maintained.

8.70 Of significant concern to many stakeholders including accountants, legal practitioners and tax agents was that in initiating legal action, the Tax Office does not appear to make a distinction between taxpayers who have the capacity to pay the debt but refuse to and those who want to pay but are unable to do so due to unforeseen circumstances or a downturn in business.

Considering viability

8.71 Some tax agents and taxpayer representative groups express the view that taking a more commercial approach involves properly considering the circumstances and viability of the business before initiating legal action. As such, they feel that the Tax Office is too ready to bankrupt a taxpayer or liquidate a company rather than negotiate acceptable payment arrangements.

8.72 In response, the Tax Office states that bankruptcy or liquidation action will only be initiated after reasonable attempts are made to make contact with the taxpayer to determine whether an acceptable payment arrangement could be negotiated.

8.73 However, a number of accountants assert that quite often the Tax Office is not willing to consider or does not appreciate or understand the nature and circumstances of the business and will not adopt a flexible approach to help the business continue trading. They indicate that there is no assistance or initiative provided by the Tax Office to help businesses in this situation, but rather, the Tax Office appears determined to proceed to bankruptcy or liquidation.

8.74 In particular, a number of tax practitioners are of the view that the Tax Office does not seem to appreciate other external factors that may affect a small business meeting its tax obligations. An example of one such external factor is where a debtor of the small business goes into liquidation owing them money for goods or services supplied. Some practitioners are of the view the Tax Office lacks commerciality when dealing with such matters and takes a very hard-line approach without appreciating the underlying viability of the business and the cause of the outstanding debt. They state that in many instances, the Tax Office would indicate to them that maybe they should get another loan from the bank or sell a business asset to pay the debt. They argue that in some instances such external factors may have only have a short-term impact on cash flow without affecting the underlying viability of the business. They suggest that by the Tax Office not properly understanding the cause of the debt or the circumstances of the business and by not examining the viability of the business, it may unnecessarily force a business into administration or liquidation.

8.75 The Tax Office states that at various stages along the recovery action process, a tax officer may need to consider issues related to the viability of a taxpayer. For example, where the Tax Office has issued a section 459E notice and a tax officer considers a proposal to pay tax by instalments or defer payment for a short term, an important consideration is to determine, on the facts available, whether a reasonable person would believe the taxpayer was insolvent.

8.76 The Tax Office also states that in the majority of cases the tax officer is guided to decide in favour of the taxpayer so as to provide a clear opportunity to bring their obligations up to date.

Motivating proprietor to focus on payment

8.77 Commercial debt recovery agents state that it is important that the Tax Office aim to motivate debtors to pay the outstanding debt by focusing the debtor's attention on paying at an earlier point in time. They state, and tax practitioners confirm, that initially debtors may try to ignore the debt and hope that circumstances will improve. In such circumstances, if there is a delay in initiating the collection of the debt, then there is the risk that it may accumulate to the point where the debtor will not be able to repay.

8.78 They argue that the absence of a timely response on the part of the Tax Office, either in initiating legal action or even actively following up on an outstanding debt, means that small business debtors, in particular, those with cash flow problems, do not focus on paying their outstanding tax debt. Tax practitioners observe that in some cases there are debts that are one to two years outstanding where the Tax Office has not taken active follow-up action. They observe that in these situations the taxpayer normally receives an automatically generated reminder letter or final notice from time to time, but there is no follow-up action. This, they argue, has the effect of creating an atmosphere where the Tax Office is seen as not simply as another creditor but one who does not chase up on its debts.

8.79 They assert that the Tax Office's current responses do not focus the debtor's attention to either paying the debt or entering into a payment arrangement. Rather, the lack of follow-up causes the debt to the Tax Office to be 'put near the bottom of the pile' notwithstanding the compounding interest charges.

8.80 Furthermore, they argue that the process of issuing of reminder notices after 60 days lacks commercial reality, as debtors will not put this account on their credit ledgers.

8.81 The Tax Office indicates that the Director Penalty Notice provisions are designed to provide directors of the company with the opportunity to assess whether they have the funds to pay the tax now or in the future. The Tax Office suggests that these provisions encourage directors to make an assessment of solvency.

8.82 The Tax Office states that it has issued approximately 20,000 notices to directors since July 2003, in relation to $1.2 billion in outstanding tax.

8.83 The Tax Office also indicates that the common outcomes of issuing a section 459E notice are either payment or entry into a payment arrangement.

8.84 The Tax Office states that it has issued approximately 10,500 section 459E notices since July 2003, in relation to $1.1 billion in outstanding tax. Of the 10,500 notices, the Tax Office indicates that the majority are issued in relation to businesses not responding to earlier opportunities to comply and the debt is escalating.

Tax Office approach at creditors' meetings

8.85 Another concern raised by insolvency practitioners is that, at times, the Tax Office is not commercial when voting at creditors' meetings. They indicate that the Tax Office appears to be unduly influenced, at the detriment of other creditors, by promoting compliance. They argue that the position adopted by the Tax Office at creditors' meetings should be solely based on commercial outcomes. They reject the Tax Office's contention that voting at these meetings should be used effectively to punish non-compliant proprietors. They suggest that there are other avenues available for the Tax Office to effect compliance without unduly affecting other creditors' interests. This could include taking a far stricter approach with non-compliant proprietors in the future.

8.86 Insolvency practitioners indicate a tendency on the part of the Tax Office to vote against proposed deeds of arrangement. This is despite a better commercial outcome for all creditors if the arrangement was accepted as opposed to proceeding to winding-up the business. Insolvency practitioners argue that the Tax Office should not be punishing businesses for non-compliance through the non-acceptance of proposed deeds of arrangement, especially where other creditors are also involved.

8.87 The ATO receivables policy provides some guidance on how the Tax Office approaches settlement offers made to liquidators by debtors to a company in liquidation.

8.88 The ATO receivables policy states that in the course of the winding-up, a liquidator is required to pursue amounts due to or claimed by the company. When seeking to recover these amounts, it is common for the liquidator to receive settlement offers for a sum less than the full claim. If the amount claimed is more than $20,000 the liquidator cannot compromise the debt without the approval of the court, the committee of inspection or a resolution of creditors.74

8.89 The Tax Office states that, as a creditor, it will generally vote in favour of such a compromise offer when it appears that the settlement will result in a greater return to the liquidation administration than if litigation to recover debts is allowed to take its full course.

8.90 In coming to such a decision, some of the relevant considerations listed in the ATO receivables policy include:

  • the chances of success if litigation is to be initiated or continued;
  • if the litigation is ultimately successful, the ability of the defendant to meet the judgment debt;
  • the costs of pursuing the debt, particularly if creditors, including the Commissioner, will have to indemnify the liquidator to progress the litigation further;
  • the time it may take to achieve recovery through litigation, including the additional costs of the liquidator that will be incurred in this period and which will rank ahead of the unsecured creditors' claims; and
  • the attitude of other 'arms length' creditors.

8.91 The Tax Office also states that in some instances the Commissioner may, for public interest reasons, consider that an offer should be rejected and litigation continued.An example of where the Tax Office may take such a stance is where a director has deliberately structured the company's and their own affairs in an attempt to minimise creditors' chances of recovery.

8.92 The Tax Office is of the view that to accept an offer in these circumstances, especially for a token amount, may only encourage non-compliant behaviour in the future.

8.93 However, before voting against an offer solely on public interest grounds, the Commissioner states that he will also consider the attitude of the other 'arms length' creditors and the effect that his vote will have on them. In particular, this will include the extent to which they may be financially disadvantaged by the rejection of the settlement offer.

8.94 Insolvency practitioners have also expressed some concern that the Tax Office does not provide any explanation or basis at such meetings as to why it is rejecting a settlement offer, leaving other creditors frustrated and generally unhappy with the Tax Office stance. In response, the Tax Office has indicated that quite often its stance would be based upon additional information it has in its possession. However, under the taxation law secrecy provisions a tax officer is precluded from disclosing information relating to the taxpayer to another person.

8.95 Additionally, insolvency practitioners observe that in many instances the Tax Office will not turn up at creditors' meetings.


61 For example, Section 255-5 in Schedule 1 of the Taxation Administration Act 1953.

62 Insolvency and Trustee Service Australia, Annual Report by the Inspector-General in Bankruptcy on the Operation of the Bankruptcy Act 2002-2003, Canberra, 2003, p. 14.

63 Insolvency and Trustee Service Australia, Administrations under the Bankruptcy Act 1966, Statistics (Provisional), Financial Year Ended 30 June 2004 – Release 88, 9 July 2004, available at http://www.itsa.gov.au/dir228/ itsaweb.nsf/docindex/Statistics->Annual%20Statistics->Annual%20Stats%20Documents/$FILE/Jun%2003-04%20stats.xls?OpenElement

64 Taxation Ombudsman, written submission, 25 May 2004, p. 1.

65 Insolvency and Trustee Service Australia, Profiles of Debtors 2003, 2004, p. 13.

66 ibid.

67 ibid, p. 31.

68 ibid, p. 22.

69 ibid.

70 ibid, p. 31.

71 'More firms in strife over tax', Australian Financial Review, 19 October 2004, p. 47.

72 'Insolvency increase', Australian Financial Review, 6 October 2004, p. 4.

73 APS 5 and above.

74 Pursuant to subsection 477(2A) of the Corporations Act 2001.