Debt collection efforts at the Australian Taxation Office are now on a “firmer footing” than in recent years, Deputy Commissioner Will Day has confirmed, with the number of enforcement actions from the tax office expected to hit pre-COVID levels in 2023.
However, businesses bearing significant tax debts have been encouraged to step forward first, with the ATO pledging to work with struggling companies before slogging them with harsh court orders.
Speaking to SmartCompany, Day, who leads the tax office’s small business operations, outlined a number of priorities for the ATO in 2023 — including work to ensure tax compliance among SMEs, many of which may be struggling through a difficult economic environment.
The ATO is “acutely conscious” of how Australia’s economy is “treading a very narrow path”, Day says.
“We are very conscious of the pressures that are being felt right across small business.
“I think of increasing interest rates, and rents, the cost of business inputs, as well as supply chain stresses and labour market pressures across the board.”
Nevertheless, “in the midst of this, good businesses still need to meet their tax and super obligations,” Day adds.
This focus on tax compliance has led to an increase in statutory demands levelled against corporate debtors by the ATO, with 1703 sent so far this financial year.
The ATO has also referred 139 businesses for potential wind-up over the same period.
“Insolvency actions across the community have been steadily increasing since late last year, and in line with this our own activity has started to increase,” an ATO spokesperson said.
“Whilst this is an increase compared to the last three years, it is not yet at pre-COVID levels,” they continued.
“However, we expect volumes to return to pre-COVID levels over the coming year.”
The ATO’s changing approach to tax debts comes after a long period of leniency from the tax office, caused by COVID-19 lockdowns and other economic shocks associated with the pandemic.
In March 2020, the federal government introduced a temporary ten-fold increase to the minimum amount owed to a creditor before they could file a statutory demand for payment from a company.
That move raised the threshold from $2000 to $20,000, making it harder for creditors, including the ATO, to chase what they were owed.
Companies were also given six months to respond to statutory demands, up from 21 days, and directors were given temporary protection from personal liability for insolvent trading.
The ATO maintained a largely hands-off posture for much of 2021 and early 2022, even after those temporary measures came to an end, as pandemic restrictions continued to threaten the economy and businesses recovered from a spate of natural disasters.
While that leniency may have kept struggling businesses going, it came at a significant cost to the federal government.
Today, the ATO states 65% of collectable debt is held by small businesses, with a value of around $30 billion.
Just over 70% of that figure, or around $22 billion, relates to employees’ tax withholding, GST, and other liabilities reported to the ATO on business activity statements.
Some $1.7 billion in small business debts to the ATO relate to unpaid employee superannuation.
External data from financial risk reporting agency Alares indicates how the tax office is now ramping up its compliance operations in 2023 as it seeks to reduce the tax gap.
The ATO filed more company wind-up orders, bankruptcy notices, and money owing claims in February 2022 than at any point since December 2019, Alares states.
The ATO also filed significantly more wind-up applications in February 2023 than any other month since the pandemic began, with its applications growing as a proportion of all attempted wind-up orders.
More broadly, data from the Australian Securities and Investments Commission, compiled by Insolvency Australia, demonstrates how creditors of all kinds are ramping up their collection efforts.
In the full 2021-2022 financial year, the courts counted 951 wind-up applications, the industry organisation claims.
The courts registered 543 wind-up applications in the first half of 2022-2023 alone, suggesting debt collection activities, the majority of which are not initiated by the ATO, are only increasing in pace.
While recognising the Australian economy is currently in “uncharted waters”, Day says debt collection activities are essential to protect market integrity and keep public services functioning.
“We have to ensure there is no unfair competition from those who don’t meet their obligations,” he says.
“We do need to pay for the services the community needs.
“And we also recognise that there will be businesses that are no longer viable, such that an early exit is in the best interest of the principals of that business, as well as all creditors.”
Beyond wind-up applications and statutory demands, Day maintains the tax office has other compliance tools available as it attempts to balance its books.
“We certainly can make tax debts visible to the credit reporting bureaus,” Day says.
“We can look at director penalty notices, and have started issuing more numbers of director penalty notices.”
However, there is one “good sign” emerging from the problem of Australia’s massive tax debt, Day adds: around 70% of the ATO’s collectible debt is primary tax self-reported by taxpayers, meaning the bulk of the nation’s tax debt is acknowledged by corporate debtors.
A further 15% is interest on that primary tax, meaning a relatively small portion of the overall tax gap is the result of deliberate tax avoidance.
“This means to me that the majority of that collectible debt, which excludes disputed debt, is a result of honest businesses genuinely trying to do the right thing and reporting it in their income tax activity,” he says.
As the ATO ramps up its enforcement activities, Day reiterates it is better for those indebted businesses to step forward and discuss repayment plans with the ATO before the tax office resorts to harsher court orders.
“I would say again if a small business has a tax debt it is important that they engage with us to ensure that we can work with them to develop a tailored payment option that suits them,” Day continues.
Some 300,000 small businesses have an active payment plan with the ATO, accounting for 20% of the collectable debt owed by the SME community.
The ATO can organise payment plans online for corporate debts up to $100,000, Day adds.
“We are absolutely committed to providing support and advice to small business who engage with us, to actively find a solution, and it’s only in those circumstances which a taxpayer refuses to effectively engage with us that we will look at actions.
“So I think that the underlying message here for me is that we’re here to work with the small business community, to provide solutions and to help them get on track if they have a business tax debt.”
To help small businesses handle their obligations, the ATO is also working to develop a new online small business portal, which it says will feature lessons and tutorials designed to increase tax, superannuation and business literacy.
That website, announced last year, is now expected to arrive in the second half of 2023.
Separately, Day highlights the ATO’s Cash Flow Coaching Kit, a set of resources designed to help tax professionals and trusted advisors deliver practical tips to their SME clients.
Tax agents have also been encouraged to speak with eligible clients about the streamlined small business insolvency scheme.
“We are absolutely redoubling our efforts to make the tax system as as convenient, straightforward and supported as we possibly can,” Day says.
Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
