9.1 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 approach to the compromise of tax debts. Few submissions voiced views on this aspect of the Tax Office's small business debt collection practices. This chapter outlines those views.
9.2 Essentially, a compromise represents an agreement between a creditor and a debtor that involves the creditor accepting a lesser sum in full satisfaction of a debt.
9.3 The Tax Office defines a compromise as an arrangement in which it accepts an amount less than the primary tax outstanding in full settlement of an undisputed debt in circumstances where a taxpayer does not have the capacity to pay a debt in full. By contrast, an arrangement in which the Tax Office accepts less than the primary tax in full settlement of a disputed debt is called a 'settlement' by the Tax Office.
9.4 Applications for compromise are considered on a case-by-case basis. A tax officer is to follow the guidelines set out in Chapter 27 of the ATO receivables policy in considering an application for compromise.
9.5 The Commissioner has delegated to all tax officers carrying out the debt collection function the power to reject applications from taxpayers to compromise tax debts due to the Commonwealth.
9.6 Any applications for compromise that are to be rejected are handled at the case officer level. If a tax officer is of the view that the circumstances set out in an application may warrant compromise of the tax debt, then the case is escalated to a tax officer who has the authority to approve a compromise application.
9.7 According to the Instrument of Delegation, the Commissioner's power to approve applications from taxpayers to compromise tax debts due to the Commonwealth has been delegated to only 13 senior tax officials. However, in later correspondence the Tax Office has stated that only six senior tax officials presently hold the delegation to approve compromise applications.
9.8 For the year of income 2001-02, the Tax Office states that it received a total of four applications for the compromise of tax debts totalling approximately $1.3 million. Three applications were from small business taxpayers, totalling $610,885. For the year of income 2002-03, the Tax Office states that it received a total of five applications for the compromise of tax debt totalling approximately $2.5 million. Two applications were from small business taxpayers, totalling $1,682,866.
9.9 However, private sector submissions have indicated that there may be more applications for compromise than those reported by the Tax Office.
9.10 The main theme of the views expressed to the Inspector-General regarding the Tax Office's compromise policy relates to whether the compromise policy strikes an appropriate balance between the competing interests of the debtor, the Tax Office as a creditor, the additional obligations imposed upon the Commissioner by the Financial Management and Accountability Act 1997 (FMAA 1997) and the public interest.
9.11 Specifically, submissions express the following views:
- The Tax Office's compromise policy is far too strict in its approach.
- The Tax Office's compromise policy is not commercial, with little or no regard for the ongoing viability or circumstances of a business.
- The Tax Office's compromise policy is unclear whether losses are taken into consideration in determining whether to accept a compromise.
- The Tax Office's compromise policy and practices do not promote a transparent and accountable process.
- There is general confusion concerning the Tax Office's compromise policy.
Tax Office approach
9.12 Submissions indicated that the Tax Office was too strict in its approach to compromise because:
- the Tax Office's approach to compromise is more onerous than bankruptcy or liquidation; and
- the Tax Office does not compromise a part of tax debts.
9.13 However, an insolvency practitioner counsels caution in the use of the power because of the high risk of treating compliant businesses inequitably and the Tax Office's difficulty in assuring itself that a business has disclosed all assets.
Bankruptcy or liquidation approaches
9.14 A submission to the Inspector-General from a taxpayers' representative body argued that the practical result of a compromise with the Tax Office is more onerous than bankruptcy or liquidation. This is because compromise with the Tax Office entails taking all the assets of the taxpayer without any of the legal protection or objectivity afforded by bankruptcy or liquidation.
9.15 The Tax Office responds that the power to compromise undisputed debt is not an unfettered power to accept a lesser sum in full satisfaction of a debtor's indebtedness for any reason which it thinks appropriate:
The Commissioner's power to compromise must be exercised in accordance with the purpose of the taxation legislation (that is, to secure the highest net return taking into account considerations of good management and/or administrative common sense).75
Debtor's total net assets in full satisfaction of the taxation debt
9.16 The Tax Office states that any compromise offer will be expected to consist of no less than the full value of the whole of the debtor's present property, with such conditions also applying to corporate debtors.Excluded from such property would be items of basic necessity such as clothing, furniture, tools of trade and the like.
9.17 The Tax Office states that given this approach, a compromise will generally deliver a better result for the Commissioner than would be obtained by any other available recovery process. It also states that the amounts ultimately recovered using other recovery approaches may be significantly less than the amounts calculated under this approach.
9.18 In fact, the Tax Office suggests that it may be for this reason that many, if not most, debtors may be unwilling to reach a compromise settlement. The Tax Office takes the view that corporate debtors would therefore probably seek an arrangement with creditors under Part 5.3A of the Corporations Act 2001 or go into liquidation.
9.19 The Tax Office requires that there must be some benefit flowing to it in entering into a compromise agreement. That benefit may take different forms:
[it] might take the form of a saving in the costs of collection, collection at an earlier date than would otherwise be the case, collection of a greater sum than could be otherwise recovered or abandonment by the debtor of some claim or right arising under a taxation law that has a monetary value (for example, the right to carry forward losses).
Consideration will not be focused solely on the short term benefits and costs. Longer term considerations such as general compliance with taxation legislation are also relevant. Any immediate benefit of cost savings may be offset many times over if the debtor's compliance history is poor.76
Benefit over and above bankruptcy or winding-up
9.20 The ATO receivables policy specifically provides that the Tax Office will not accept compromise proposals unless there is a benefit in doing so, over and above the return that would flow from taking actions under either the Bankruptcy Act 1966 or the Corporations Act 2001. The Tax Office indicates that it will take this position notwithstanding that it may suffer the expense and delay of legal proceedings necessary to realise assets.
9.21 The reason for the Tax Office's stance is the view that to do otherwise would be to reward behaviour which amounts to non-compliance with a debtor's obligations. It argues that this would be inconsistent with the objective of achieving a high level of voluntary compliance by the community generally.
9.22 The Tax Office states that in considering whether or not to enter into a compromise, it is necessary to ensure that the proposed compromise does not disadvantage any other creditor. The Tax Office will not consider a proposal if another creditor intends to take, or has initiated, formal recovery proceedings. Also, a compromise proposal will be refused unless it can be shown that all affected creditors consent to the arrangement.
9.23 This also means that any compromise arrangements that have been, or are proposed to be, made in relation to other creditors do not place them in a position of advantage relative to the Commonwealth.
9.24 Further, the Tax Office states that not only do debtors have a responsibility to meet their payment obligations as they fall due for payment but that any alternative arrangements must be perceived as equitable by other taxpayers who do meet their payment obligations.
No compromise of part of the debt
9.25 Accountants and business advisers comment that the Tax Office's compromise policy appears to be an 'all-or-nothing' approach. They argue that the Tax Office's compromise policy does not address instances where a taxpayer seeks compromise of only part of the tax debt with an arrangement entered into for the remaining debt.
Tax Office compromise policy's regard for ongoing viability of business
9.26 Taxpayers' representative bodies and tax practitioners also raise the concern that the Tax Office's compromise policy is not commercial and has little or no regard for the ongoing viability or circumstances of a business. This is especially so where the most significant assets of the business are intellectual property rights or rights to occupy premises or conduct a particular business. They argue that if the debtor was to be made bankrupt or enter into voluntary administration in such circumstances there would be a forfeiture of all such rights. This would mean the business has lost its most significant asset and along with it any prospect of continuing to trade.
9.27 The Tax Office states that it is not in a position to determine the viability of a business.However, it points out that in considering a compromise proposal, tax officials are required to make an assessment of what the position will be without a compromise. They are required to consider the value of the debtor's present property along with the debtor's future prospects, past transactions and the position of any related entities.
9.28 The Tax Office has stated that it has additional obligations imposed under the FMAA 1997 that do not allow a purely commercial approach to be taken in deciding when to compromise a tax debt. It also argues that a broader exercise of the compromise power would have a detrimental effect on promoting and encouraging voluntary compliance. As such, the Tax Office argues that the compromise power should only be exercised in very limited circumstances, especially given the other legal avenues available to deal with outstanding debt such as bankruptcy and liquidation.
9.29 The Tax Office indicates two broad areas where it thinks it is appropriate to enter into a compromise agreement.
9.30 Firstly, it may be appropriate where considerations of good management or administrative commonsense mean that it is the most efficient way in which to achieve the purpose of collecting taxation liabilities.
9.31 Secondly, it may be appropriate where the Commissioner concludes that more tax can be recovered by entering into a compromise than by pursuing alternative remedies, such as agreeing to accept payment over an extended period of time or instituting legal proceedings leading to bankruptcy or liquidation.
9.32 However, the Tax Office has qualified the comments regarding the circumstances where compromise is appropriate by stating that:
considerations which are not directly related to the Commissioner's function of collecting taxes cannot justify the use of the power to compromise.
9.33 By way of example, the Commissioner has listed the following circumstances where it would not be permissible to compromise to:
- assist those debtors who may have overcommitted themselves;
- save a business from closure because a large number of people in a particular region depended on the business for employment;
- avoid the failure of a business because the activities of the business might be seen to be serving a national interest (for example, a large exporter, a producer of a key raw material or product);
- alleviate what may be perceived to be a harsh or unfair operation of a tax law in particular circumstances;
- avoid hardship (such as the need to sell a home or a business); or
- create for the Commissioner a benevolent public image or in the furtherance of some charitable objective.
9.34 Further, the losses arising from the costs or delay involved in enforcing any remedies outside compromise are seen by the Tax Office as costs associated with the achievement of the broader objective of voluntary compliance by the taxpaying community at large. For the Tax Office, exercising good management and administrative commonsense in the general administration of the tax law entails giving precedence to this objective over the recovery of some additional funds in individual cases.
9.35 This means that non-compliant behaviour in the form of reckless or careless failure to make provision to pay an expected tax liability, even by instalments over time, is not rewarded or condoned by the Tax Office.
Position regarding availability of tax losses
9.36 A submission by a taxpayers' representative body raised the concern that the Tax Office's compromise policy is unclear regarding whether losses are taken into consideration in determining whether to accept a compromise proposal. It suggests that, if this were not the case, it would be a serious short coming as it would mean that a debtor is not able to use its available prior losses as a trade-off to allow the business to continue trading, especially where particular circumstances have placed the business in trouble.
9.37 In any event, the body suggests that the ATO receivables policy needs to be clearer on this issue and provide far greater guidance to taxpayers on what the Tax Office will consider so as to allow taxpayers to prepare compromise proposals that will provide a business with every opportunity to continue to trade.
9.38 The Tax Office points out that the ATO receivables policy makes specific mention of losses in the context of a compromise settlement: paragraphs 27.6.34 to 27.6.37.These paragraphs require tax officials to bind the debtor not to claim losses against income of future years and to exclude capital losses from the calculation of future net capital gains or losses.No reason for this approach is provided by the Tax Office other than:
it would be quite unacceptable that a debtor be allowed the benefit of a compromise, whether in respect of an income tax debt or some other tax debt, but at the same time retain the right to offset losses against future income or capital gains.77
Taxpayer uncertainty with Tax Office's compromise policy
9.39 In discussions with various stakeholders including accountants, tax agents, legal practitioners and a taxpayers' representative body, an issue of concern raised was whether the Tax Office's policy and practices promoted a transparent and accountable process.
9.40 Stakeholders suggest that there is a lack of awareness that the Tax Office even has a compromise policy or that the compromise policy is not widely revealed by the Tax Office.
9.41 A submission from a taxpayers' representative body stated that, apart from the ATO receivables policy, there is very little information available on the Tax Office's administration of the compromise power. This includes the number of compromise applications received by the Tax Office, number of compromise applications accepted by the Tax Office and forms for making an application for compromise of a tax debt.
9.42 The Tax Office provided the following information for the 2001-02 year.
|Total Cases||Amount subject to
|Decision pending||Referral to SES/EL2||Accepted by SES/EL2|
Source: Tax Office * relates to small business taxpayers
9.43 The Tax Office provided the following information for the 2002-03 year.
|Total Cases||Amount subject to
|Decision pending||Referral to SES/EL2||Accepted by SES/EL2|
|1||[no amount provided]||No||Yes||Yes|
Source: Tax Office * relates to small business taxpayers
9.44 The taxpayers' representative body was of the view that that there is little additional guidance on determining whether or not the Commissioner would compromise a taxation debt. It commented that the Tax Office could provide clearer guidance on key terms that are relevant in that determination.
9.45 The Tax Office states that the ATO receivables policy outlines the relevant considerations in determining whether or nor to compromise a taxation debt. The Commissioner indicates that in determining whether a taxation debt should be compromised, there are a number of matters that need to be considered.These include:
- determining the potential return to the Commissioner if there is no compromise;
- what allowance should be made, if any, for tax losses that may be available; and
- determining the return to the Commonwealth if the compromise were accepted.
9.46 Further, the Tax Office states that the ATO receivables policy specifies the circumstances in which it will not enter a compromise and those circumstances in which it will.
General confusion concerning 'compromise'
9.47 Other concerns were raised with the Tax Office's compromise policy including whether such a policy actually existed, the complexity of the policy, what compromise entailed and the circumstances in which compromise was available.
9.48 There was also some uncertainty as to what the term 'compromise' actually entailed. For some, the term was associated with the liability to pay the debt as opposed to the obligation to pay. Also some people confused the compromise of primary tax debts with the notion of remitting interest and penalties.
76 ibid, paragraph 27.6.4.
77 ibid, paragraph 27.6.34.