The Inspector-General of Taxation & Taxation Ombudsman (IGTO) Karen Payne today released her latest report, “An investigation and exploration of undisputed tax debts in Australia”. The June 2021 report presents a summary and analysis of a large amount of data as supplied by the Australian Taxation Office (the ATO). The data relates to levels of undisputed tax debts (and changes in these debts) over the past several years, commencing in FY16 and ending in FY20 - that is, as reported at 30 June in each financial year. The report delivers a number of key related insights.
Ms Payne noted that the IGTO makes five recommendations for consideration by the ATO as outputs from the investigation (see below). The ATO’s response is included in Appendix B of the report. An undisputed tax debts summary slide presentation has also been released by the IGTO in conjunction with the report, in order to highlight some of the key findings, recommendations, and areas identified for further investigation.
“The report is a key piece of research intended to provide Australian tax payers, tax practitioners, government and business with a detailed understanding of where tax debts are accruing in the tax system and occurring in the economy,” Ms Payne said.
“It is a significant measure of economic maturity to be able to understand and manage positive change in tax debt collection and management,” said Ms Payne. “We want to support fairer and smarter ways of managing tax debt collection. In addition, we want to provide a positive platform to assist the evolution of effective strategies – and ultimately to achieve improvements in this important aspect of the tax system.”
Karen Payne emphasised that an efficient and effective tax debt collection system is in the interests of all Australians. “Actual collection of taxes, including the effective pursuit and recovery of tax debts, is an important moderating factor in decisions to raise or increase taxes and few governments or taxpayers would want to see taxes increased unnecessarily,” she said. Accordingly, the key objectives of the IGTO’s undisputed tax investigation are to:
- Analyse – where tax debts are accruing and occurring in the tax system and the economy;
- Identify - areas for further and targeted investigation; and
- Support fairness and transparency - by presenting key facts and information for the benefit of stakeholders wishing to engage with and improve the administration of the tax system.
Key Report Findings
1. Payment Plan Arrangements can assist taxpayers
“Payment plan arrangements are an important feature of the Australian tax system and provide crucial assistance for small business, large business, and individual taxpayers alike to manage their tax debt obligations. These plans are also a good indicator of taxpayer engagement in managing tax debts and the overall health of the tax system.”
Across all taxpayer groups (individuals, small business and large business), payment plan arrangements as a percentage of collectable debts have been reducing across the years reviewed - as at 30 June in each of FY18, FY19 and FY20 (Slides 25 – 26). That is, with the exception of Public and multinational taxpayers – which remained unchanged between FY19 and FY20. This is surprising and signals an opportunity to improve community awareness of the existence and access to tax debt payment plans.
“We want to emphasise that the report itself is an opportunity to raise community awareness and remind all taxpayers, especially small business taxpayers or SMEs, of this important feature of the tax system . It is available pre, during and post the COVID pandemic,” said Karen Payne. Whilst the June 2021 report does not investigate why payment plans are at the reported levels, it has identified this as an area for further investigation. The IGTO encouraged taxpayers to educate themselves about payment plans.
“All taxpayers that need assistance in managing their tax debts are encouraged to contact the ATO to enter a payment plan. This is especially important as the Australian economy transitions out of the COVID-19 pandemic. Taxpayers should know that there is automated access via an online ATO system to payment arrangements for tax debts of less than $100,000. The automatic service to access payment plans has been a feature of the tax system since at least 2014 and in some cases the payment plan arrangements are provided on interest free terms. (Refer the ATO website)
2. Collectable tax debts are increasing - both pre and post COVID – and faster than tax liabilities
The IGTO notes that levels of undisputed tax debts have been increasing (Slide 8). Although SMEs owe more than 60% of collectable debts, a more complex and sophisticated analysis of debts (including by debt stratum) reveals that the majority of outstanding debt is owed by a small number of taxpayers and this is consistent not just at the whole of system level but across ALL taxpayer groups – and not just SMEs (Slides 15 – 19).
“The IGTO investigation looks beyond the OECD strategic KPI measures to analyse and assist in understanding which areas of the tax system and the Australian economy are contributing to increasing levels of undisputed debts” Ms Payne said.
The ATO does not typically report information publicly on the age, distribution by taxpayer groups, distribution by States and Territories or industry groups, breakdown by heads of tax (i.e., income tax, goods and services tax (GST), pay—as-you-go-withholding … etc.) and components of tax (primary tax, general interest charge and penalties ) in reporting collectable (undisputed) tax debts. The IGTO investigation involved a deeper dive to analyse data presented in the ATO’s Annual Report for these additional dimensions , as well as related and comparable economic data.
Based on ATO Annual Reports and information provided to the IGTO as part of this investigation, there has been an 77.6% increase in collectable (undisputed) tax debts even though over the same period tax liabilities (tax revenues) increased by 16.42%. Although COVID has accentuated the increase (FY20 includes 3 - 4 months affected by the COVID pandemic), it is not a complete explanation (given the debt trends observed prior to COVID).
3. The IGTO report does not seek to explain Why collectable debts are increasing but it does provide evidence-based insights as to where to look next!
The June 2021 report forms Phase 1 of the IGTO enquiry into tax debt. It does not seek to explain why collectable debts are increasing both pre and post COVID but it certainly helps to suggest where to take a closer look. The second phase of the investigation will be to look further at some areas of the tax administration system, which may examine:
- Why do a small percentage of debt accounts represent a significant value and percentage of outstanding collectable debts? This is especially so for individuals and small business where large tax debt balances (in excess of $1 million) are unexpected;
- What number and $ value of collectable debt accounts are aged 2+ years, 5 to 10 years, or older than 10 years, and what has been the ATO’s recovery attempts? Are these debts insolvent, disputed or collectable?
- What factors are contributing to low levels and at times declining levels of payment arrangements and serious hardship release applications? This is important to assist small business and other taxpayers recover from the COVID Pandemic;
- Are there opportunities to improve tax debt collection processes or reporting for certain industries?
- What are the impacts of new initiatives on collectable debt levels such as the expansion of DPNs to GST and the introduction of Single Touch Payroll?
- Are unexpected liabilities arising out of ATO compliance activities impacting levels of collectable debt?
- How efficient and effective are the Pay-as-you-go withholding (PAYGW) and Pay-as-you-go instalment (PAYGI) tax collection systems?
- SGC debt accounts are increasing at the fastest rate of all categories of debt – so what reasons may contribute to a low collection efficiency.
Undisputed Tax Debt Report Recommendations
The IGTO has made five recommendations as follows:
The IGTO recommends that the ATO consult with key stakeholders and relevant participants in the tax system to co-design enhanced reporting in relation to its debt book and debt recovery activities throughout the year. This enhanced reporting may be shared publicly or with discrete stakeholders, as appropriate.
[The full text of the recommendation is on pages 37 – 38 of the report]
The IGTO recommends that the ATO develops metrics to measure its debt collection performance, including a return on investment against its efforts to collect debts in relation to different client experience groups or industry groups. For example, the cost of the ATO’s debt collection activities as a percentage of the total tax debts collected.
These metrics could be reported alongside matters identified in Recommendation 1.
The IGTO recommends that the ATO:
- report (in aggregate) to the Australian Parliament all taxpayer debts which exceed a benchmark dollar value and have been outstanding for more than (say) 100 days, by client experience and industry groups, and additionally, report information in relation to those debtors that have not engaged with the ATO about the outstanding debt (e.g., entered discussions to set up a payment arrangement); and
- remind taxpayers and their advisers in writing once the taxpayer’s outstanding tax debt exceeds a benchmark dollar value and has been outstanding for more than (say) 100 days and advise that their data will be reported (as aggregated information) to the Australian Parliament unless they have entered an agreed ATO payment arrangement or other debt management arrangement on or before a prescribed date.
The IGTO recommends that the ATO actively promote the benefits of new businesses voluntarily entering the PAYGI system and ensuring that the channels to enter, exit and vary instalments are readily accessible for both taxpayers and tax practitioners.
The IGTO recommends that the ATO:
- provide greater insight into the ATO Special Division in its reporting through segmentation based on occupation (ANZSCO) codes; and
- engage with the Australian Bureau of Statistics (ABS) to identify opportunities to improve segmentation and reporting of collectable debt by industry divisions and occupation codes to enable enhanced comparative analysis.
Media Relations Contact for Office of the Inspector-General of Taxation and Taxation Ombudsman
Marjorie Johnston – Wordmakers
Mobile: 0407 329 430
 Refer OECD 2014 report
 Total liabilities were as follows:
FY16 - $468,909m
FY17 - $471,892m
FY18 - $507,788m
FY19 - $542,029m
FY20 - $545,893m