ATO shifting to firmer debt collection activity
The ATO has flagged a return to firmer debt collection actions after seeing a trend of profitable businesses that have the capacity to pay their tax debts but are actively choosing not to do so. It warns business taxpayers not to treat tax liabilities like a free loan, and reiterates that businesses are only temporary custodians of GST, PAYG withholding and super guarantee amounts. In addition to its ability to apply general interest charge (GIC) to unpaid debts, the ATO has stronger enforcement actions in its arsenal, including issuing garnishee notices and legal action.
With less than six months left in his tenure as the Commissioner of Taxation, in a recent speech Chris Jordan has unapologetically flagged the ATO’s shift to firmer debt collection actions where appropriate. This coincides with reactivation of debts that the ATO previously put on hold during the 2020 COVID-19 pandemic.
The Commissioner noted that most collectable debts with the ATO are self-assessed and include not only income tax debt, but also unremitted GST and unpaid PAYG withholding, as well as super guarantee charges related to businesses. In addition, he noted that small businesses continue to be over-represented in the ATO’s debt book, owing over $33 billion of the $50.2 billion of collectable debt, with $23 billion of that being unpaid business activity statement debt.
According to the ATO, it is seeing a trend of profitable businesses that have the capacity to pay their tax debts but are actively choosing not to do so. It is concerned that businesses appear to be deprioritising payment of tax and super and in some cases treating ATO liabilities like a free loan. The ATO reiterates that businesses that don’t pay or engage with the ATO will be subject to a range of actions.
In general, if taxpayers do not pay their tax by the due date or engage with the ATO by the due date to work out a payment plan, GIC will be applied to any unpaid amounts. GIC is automatically calculated on a daily compounding basis on the amount outstanding and added to taxpayers’ accounts periodically. The rate of GIC is revised every quarter and is calculated using the 90-day Bank Accepted Bill rate and an uplift factor of 7%. The GIC annual rate for the October to December 2023 quarter is 11.15%.
In addition to GIC being applied to unpaid debts, the ATO is also legally required by law to use any credits or refunds taxpayers become entitled to, to pay off any debt that is owed (including any debts that are “on hold”) by way of offsetting. This includes any refund that individuals may receive in relation to income tax, and any GST refunds that businesses may receive. The ATO notes there are very limited circumstances in which it has the discretion not to offset a debt, such as where there is serious financial hardship.
The ATO states that the following taxpayers will generally be subject to stronger enforcement action:
- those deemed “unwilling” to work on addressing their debt;
- those that repeatedly default on agreed payment plans;
- those that don’t have the capacity to pay the debt but also do not take any steps to resolve the situation;
- those that have been subject to an audit where deliberate avoidance is detected and payment avoidance continues; and
- those that appear to be engaging in phoenix activities.
Some of the stronger enforcement actions that the ATO may use include:
- issuing garnishee notices to a person or business that holds money now or in the future for the taxpayer;
- issuing director penalty notices for unpaid amounts; disclosure of business tax debt to credit reporting agencies; and
- legal action (ie claim or summons, bankruptcy notice, creditor’s petition, statutory demand and wind-up action).
The ATO has previously referred debts to external debt collection agencies, although it no longer does so. However, it has not ruled out doing so for future debts.
While the recent speech by the Commissioner highlighted the fact that small businesses were overrepresented in terms of collectable debt, he specifically noted that it does not mean that the ATO is solely targeting debt collection in the small business space. In reality, it is very focused on every group in the tax system, from individuals to large businesses.