Half of all payment arrangements that the ATO enters into with businesses end in default, it has been revealed.
The statistic was unearthed by SmartCompany from the minutes of the latest meeting of the ATO’s Micro Business Partnership working group, which were published on January 11.
During a discussion on the ATO’s “differentiated approach” to debt collection, ATO official Tom Reugebrink told the group of tax professionals and industry representatives that 50% of payment arrangements are defaulted.
An ATO spokesperson confirmed the figure, describing it as an “indicative measure” of the default rate.
The ATO says further details about the size of businesses that are defaulting was not available.
Payment arrangements have become more common in the last two years, and the ATO has sought to take an “empathetic” approach to help struggling SMEs through the global financial crisis and its fallout.
“The economic downturn required us to look beyond the short-term financial stress that many taxpayers were facing and consider an approach which would benefit both taxpayers and the tax system in the long-term,” the ATO spokesperson says.
However, the fact that the number of payment arrangements has increased combined with the high rate of defaults, suggests that the mountain of debt owed to the ATO will not fall any time soon.
The collectable debt owed to the ATO increased 10% to $12.15 billion in 2009-10, and has remained stubbornly above $10 billion for the last four financial years. It is estimated about 60% of this debt relates to small business.
Yasser El-Ansary, tax counsel with the Institute of Chartered Accountants, says the default rate is surprisingly high.
“It does seem like quite a high number when you consider the fact that payment arrangements are an options when a tax payer is suffering some sort of financial strain,” he says.
“It may well be the case that the higher default rate is attributable at least in part to the more relaxed approach the ATO took during the GFC… but at the end of the day there is a consistent trend evident from the SME market that tax debts remain outstanding for a considerable amount of time.”
El-Ansary suggest tax professionals and the business community may need to work with the ATO to examine the precise steps the ATO takes after a company defaults on a payment arrangement to ensure that the ATO – and taxpayers – have the best chance of recouping tax debts.
However, El-Ansary does say it is hard to say how the ATO’s debt collection process could be improved.
He says the ATO has been right to put a lot of its focus on encouraging taxpayers who may be experiencing difficulties to get in touch as early as possible, so that the Tax Office can work through a range of options.
He also says the use of payment arrangements is preferable to the ATO simply winding companies up if they are struggling, provided the ATO is careful about which businesses are offered payment arrangements.
“There’s no doubt the ATO does go through a rigorous process when they do offer a payment option.”
“Ultimately I am not sure the ATO can do a lot more than remain vigilant and make it clear to businesses that at the first sign of trouble they contact the ATO.”
For its part, the ATO says its approach to the use of payment arrangementsis determined on a case by case basis.
“We take a differentiated approach to each taxpayer based on their individual circumstances, including their payment and lodgement compliance history,” the spokesperson says.
“If a taxpayer has a history of defaulting on agreed payment arrangements, we may ask for an upfront payment and/or request that payments are made by direct debit before agreeing on a new arrangement. This confirms that the taxpayer genuinely intends to work with the ATO to manage their outstanding tax debt.”
“A record of defaulting payment arrangements is also an indicator that the business may not be viable. In these circumstances we may request information to confirm the ongoing viability of the business.”
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
