In the complex landscape of tax obligations, the Australian Taxation Office (ATO) aims to employ a strategic approach to debt management, crafted to cater to the diverse needs of businesses while maintaining fairness and equity.
The emergence of the COVID-19 pandemic brought unique challenges to the forefront. During this period, the ATO adopted an approach of balancing financial responsibility with providing support to the community.
This year the ATO returned to business-as-usual when collecting overdue debts. It has started working to reset expectations, and many businesses are already feeling the impacts. There has been more activity over the past 12 months, with an increase in firmer actions, and a willingness to escalate to legal actions for large debts, especially for those who are choosing not to engage.
The ATO is reaffirming its expectations of clients and resetting what clients can expect of the ATO. Practically speaking, this means the ATO will be acting earlier than it has been and will continue to use a range of strategies to pursue outstanding debts in line with the following four categories:
Underpinning the ATO’s debt management strategy is a focus on prevention. The ATO knows that preventing debt is the best way for businesses to stay on track, and it has seen that leaving debts unchecked and unmanaged for prolonged periods of time rarely improves future viability of a business.
The ATO seeks to empower taxpayers with the necessary information and resources to meet their obligations promptly. This is achieved through several proactive measures which include SMS reminders or online payment methods.
The ATO says early intervention is pivotal to working with clients on support and tailoring the best solutions. By engaging with taxpayers at the earliest stages, it aims to prevent minor issues from escalating. Key components of this approach include outbound phone contact or issuing warning letters. Clients are also encouraged to proactively engage with the ATO. Clients who make a choice to contact the ATO early will be best placed to discuss available options.
In cases where engagement and cooperation are lacking, the ATO employs a set of firmer actions designed to address escalating tax debt situations. These actions can include garnishee notices, director penalty notices and disclosure of business tax debt.
In some matters and generally when all avenues of engagement have been exhausted, the ATO may resort to actions such as winding up and bankruptcy.
The ATO notes that while it is often a major creditor in corporate insolvencies, and sometimes the only creditor, it is rarely an initiator of insolvency appointments. Most corporate insolvencies are initiated by the company directors or other creditors.
The introduction of the Disclosure of Business Tax Debts legislation has brought an added layer of transparency to tax debt management. The legislation serves several purposes:
- Visibility: Overdue tax debts are made more visible to support informed decision-making within the business community.
- Engagement: Taxpayers are motivated to engage more with the ATO for effective debt management.
- Fairness: The legislation reduces the advantage enjoyed by businesses that do not meet their tax obligations on time.
Under the Disclosure of Business Tax Debt measure, the ATO may disclose tax debt information to credit reporting bureaus under specific conditions, some of which include:
- When a business is not engaging with the ATO
- Has one or more tax debts at least $100,000 that are overdue by more than 90 days
- Has an ABN and isn’t an excluded entity
- The business doesn’t have an active complaint with the Inspector-General of Taxation and Ombudsmen about the proposed reporting of the tax
Effective engagement remains central to the ATO’s approach to disclosure. This extends beyond mere contact and involves achieving outcomes that substantially address tax debt. Active payment arrangements, debt release applications, and pending taxation decisions to which the debt relates (there is an active objection, review with the Administrative Appeals Tribunal (AAT), or appeal to the court) are all indicative of effective engagement.
It is important to note that every business that meets the criteria for disclosure will automatically receive a formal Notice of Intent to Disclose from the ATO, as soon as they become eligible.
For those businesses that don’t act, the ATO will progressively disclose their information, which will be incorporated into their credit scores and credit rating reports to be removed when their debts no longer meet the criteria for reporting.
The ATO collaborates with credit reporting bureaus to enhance debt transparency. Details disclosed include ABNs, legal and business names, entity types, and overdue tax debt amounts. Credit reporting bureaus that have registered with the ATO and signed a Deed of Agreement, such as CreditorWatch, and adhere to established standards, receive tax debt default records for reporting.
In FY23, the ATO issued close to 19,000 Intent to Disclose Notices to clients that fit the criteria for disclosure of business tax debt.
- One in three taxpayers subsequently took action to engage.
- Over 2,000 clients paid their debts in full, which equated to more than half a billion dollars of ATO debt paid once the business knew their debts would be disclosed.
- Of the 867 business tax debts that were disclosed to credit reporting bureaus, 185 businesses re-engaged with the ATO following the disclosure.
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