After taking a more restrained approach to collections during the pandemic, the Australian Taxation Office (ATO) has indicated that is now increasing ‘firmer actions’ such as Director Penalty Notices and garnishees in order to reduce the more than $60 billion in outstanding debt owed to it.

We sat down with Claire O’Neill, Assistant Commissioner, Integrity at the ATO to find out the options that businesses with outstanding tax debts have, and the steps that the tax office will take to work with businesses before taking extreme action such as publicly declaring tax debts.

CreditorWatch

The ATO is currently ramping up what it calls ‘firmer actions’. Could you just tell us a bit more by exactly what you mean by firm actions?

Claire O’Neill, Assistant Commissioner, Integrity, Australian Taxation Office (ATO)

Firmer actions are the actions we might take when a client still doesn’t engage after we try to offer them help and assistance to either pay in full or go into a payment plan. Ideally, what we’re wanting is payment in full. But if people can’t make payment in full, we’re wanting people to go into payment plans.

Where we can’t get a client to engage appropriately with a payment plan, that’s when we might need to escalate for further action. Some of those firmer actions are things such as disclosure, but also garnishees or Director Penalty Notices.

CreditorWatch

So, what kind of levels are those actions currently at?

Claire

It’s about getting back to more normal, pre-COVID levels. We’re still in ramp-up phase now, but the pattern is starting to look more like what it was before COVID.

There are more taxpayers who have debts with us than ever before. So that in and of itself means there’s going to be higher volumes. I think towards the end of this calendar year, but then into the start of next calendar year, is when it will start to feel like a bit more of a normal setting.

CreditorWatch

Why are there more taxpayers than ever before with outstanding tax debts?

Claire

It really is just the impact of the last couple of years. Most taxpayers who end up in a debit situation with us do end up paying soon after or enter payment arrangements. When we think about the last two years, though, we had more people get into debt to start with and more who were less likely, or less able to get back on track which means debts were carried for longer.   

CreditorWatch

What is the current size of the outstanding debt owed to the ATO and, and is that rising or falling and how does that compare to historical levels?

Claire

Total debt owed to the ATO is sitting around $60 billion. Total debt always tends to rise as the economy grows.  So, whatever the size of the economy, and the size of our tax collections, there will always be an element of debt.  It’s just purely proportional.

So, a rise in the debt book isn’t by itself the concern – the concern is that the rise over the last two years has been out of pattern with collections. The ratio of debt compared to collections is higher than it has been and it’s the comparative ratio that we’re really focused on trying to get back down.

CreditorWatch

So, by historical levels, is that ratio higher than it’s ever been?

Claire

Definitely. In the years before the pandemic, the ratio of collectable debt to tax collections generally sat around 5.5 to 5.7 per cent.

However, after the first year of the pandemic, that ratio went above six per cent and then it crept up over eight per cent. So that’s really the pressure. 

CreditorWatch

Which particular industries or size of businesses are prone to having outstanding tax debts?

Claire

Two thirds of our collectible debt book is small business. That was the case before the pandemic, it was the case during the pandemic, and it’s the case today. It’s interesting that that proportional representation didn’t shift during the pandemic at all.

The construction industry definitely features, which would probably be of no surprise to you. Some industries like retail have been interesting because some retail businesses absolutely thrived during the pandemic, whereas others almost decimated. Similarly for hospitality.

CreditorWatch

So, what are the reasons for those businesses with outstanding tax debts not engaging with the ATO?

Claire

I would say there’s two reasons. One is just sticking their head in the sand, particularly for small businesses where they get into a situation due to cash flow or other impacts and they might be scared, they might be in denial. And often small businesses are run by ordinary people having a crack at running a business – they may not be expert business operators.  And if they’re not managing cash flow from the very outset, or encounter and unexpected disruption to their cash flow, they can end up in a situation where they do have debts but don’t really know what to do about it.

We’re trying to get the message to those businesses that we’re here to help. There’s no point sticking your head in the sand. The earlier you can talk to us, the better. That’s really important.

That’s the first group and then the second group, which is the smaller group, but a very real group, is deliberate non-compliance, where there are businesses who will just hold on to their cash and actively chose not to pay their tax. They will use their cash for as long as they need to for other purposes rather than paying their employee’s super, GST, income tax and other obligations. Our much firmer, stronger actions are intended for these businesses.

CreditorWatch

Does it tend to be repeat offenders as well?

Claire

There can be repeat offenders, but for the most part if we can get in early with help and assistance, have them engage with us, and help them set up a sustainable payment plan then they can get back on track and stay on track.

But there are certainly some that are more longer term recalcitrant, and they end up at that firmer end of our pipeline.

CreditorWatch

So, what powers does the ATO have to wind up a business in that instance?

Claire

Firstly, the main thing is that we’re a creditor like any other creditor.  In most cases of insolvency, our participation is as a creditor and not as the initiator of the wind-up.  What I’d say in terms of scale, is that insolvency work across the market will probably take longer than other actions to get back to pre-pandemic levels.

CreditorWatch

The ATO has a process it goes through with businesses before it discloses their tax debts to credit bureaus such as CreditorWatch. Could you take us through that please?

Claire

The first time that someone hears from us about the potential for disclosure will not be the first time they’ve heard from us about their debt. We only ever get to the stage of talking to them about disclosure when we’ve already tried to engage with them about the debt when the debt first arose.

At a high level the criteria are that the business must have a large tax debt of which at least $100,000 has been overdue for more than 90 days, and there must be no active complaint with the Inspector General of Taxation. When they hit those criteria, the first step is that we issue an Intent to Disclose Notice. We talk about that being in writing which means that it’s sent as a letter either digitally or by mail. The notice gives the taxpayer 28 days to take action. And there are a number of things they can do to take action to show that they’re effectively engaging.

If they get to the end of that 28 days, that’s when we can consider disclosure.  If we have reason to be sure that the business does know about the debt, that they know about the potential for disclosure, and have had ample opportunity to take action to avoid disclosure, then we will take steps to disclose their tax debt information with credit reporting bureaus such as yourselves. We do this once a week at the moment.

Once we’ve disclosed someone, we do write to them and let them know again in writing that their debt has been disclosed.

And of course, if they then take action and no longer meet the criteria, we work with the credit reporting bureaus to remove their information from their credit reports.  And I think that’s a really important message too – that it’s never too late to engage us, even if you’ve already been disclosed. Come and engage because your information can be removed again.

 CreditorWatch

So, the disclosure process is working successfully as a trigger for businesses to pay their outstanding tax debts?

Claire

It’s still early days so it’s a bit hard to put firm numbers around response rates. But roughly what we’re seeing is about a third of businesses do engage when we first attempt engagement, such as a phone call, to talk to them about the potential for disclosure.

If that first engagement attempt didn’t succeed and we then issue the actual Intent to Disclose Notice, we then about another third respond.  That leaves about a third that are then eligible for actual disclosure. Out of those that we’ve actually disclosed so far, a small number have then taken action as well so they’ve had their tax debt information remove from their credit report.

That’s kind of roughly the response rate we’re looking at, but it is very early days. And because it is largely a manual process at this stage, we’re working from the top of the tree down – so, the highest debtors first. And as we get to more of the population who have smaller debt amounts, and maybe their debts are not as old as some of the ones we’re dealing with now, I am optimistic that the response rate will climb even higher.

Obviously if someone’s got a debt that’s not quite as big and it’s still relatively new, there’s a good chance we can get engagement. It’s much harder to engage and to recover payment if the debt is very, very large and it’s been overdue for a number of years. So, the response rates might change as we just continue to work through the population.

CreditorWatch

But the number of files going to credit bureaus will continue to increase right?

Claire

Absolutely. But it’s been hard to put a number on what we think the forecast could be. What I can say is that about 30,000 businesses in March met the criteria for disclosure. And we wrote to 30,000 of them to let them know we are now using this new power. They weren’t intent notices. They were just awareness letters to let them know that this is now on the cards.

As a result of that awareness campaign, that group of 30,000 has dropped to about 22,000, so nearly a third took action just from that campaign. With the Intention to Disclose Notices it’s a manual process, so we are working our way through the remaining businesses who are still eligible. That’s where we’re seeing roughly another third responding once they get that formal Intent to Disclose Notice.

CreditorWatch

How likely is it that the $100,000 threshold for disclosure will be reviewed?

Claire

The threshold is set by government. It’s in law. So, it’s a question for the government of the day. It’s not a question for the ATO. We can’t change the threshold.

CreditorWatch

Your branch of the ATO is working on a Government Payments Program for service providers. Could you please tell us a bit more about that?

Claire

The Government Payments Program is a data-matching program developed by the ATO focused on third-party service providers in a range of industries, who are paid by government to deliver their services. This includes services like vocational training providers, childcare operators, NDIS service providers and a range of other businesses who received government payments for their services.

What this payments program is about is looking at ways to strengthen the integrity of the system across government.  For instance, by working with service providers and government agencies to understand the broader environment, risks, and to identify providers who may be operating outside of the system.  This includes looking at the lodgment and payment behaviour of service providers when it comes to their own tax and super obligations. 

There’s definitely an opportunity to strengthen the integrity of the broader eco-system and to make those service providers more aware of the importance of complying with their obligations.

CreditorWatch

Are there any other upcoming areas of focus you could share with us?

Claire

The shadow economy is a huge focus for us, and we encourage the community to share intelligence with us via tip-offs.

All of the community intelligence that comes to the ATO about potential tax misconduct, including shadow economy behaviour, is assessed by teams in my branch.

And it’s not just businesses operating outside of the system who we get tip-offs about. We’re very aware that, particularly in the current labour market, there are businesses under pressure from potential employees who are demanding to be paid in cash. So there are some interesting dynamics playing out there at the moment.