Understanding the nature of Crown debts, particularly debts owed to the Australian Taxation Office (ATO), is essential for advisors and their clients to make informed decisions.
While most ordinary liabilities in Australia are subject to strict limitation periods under state legislation, Commonwealth tax debts are governed by a completely different legal framework. As a result, ATO debts do not become statute‑barred, even after decades.
This article explains how and why this distinction exists.
State Limitation Acts do not apply to Commonwealth debts
For creditors, the recovery of debts is restricted by state legislation, such as the Limitation Act 1969 (NSW), Limitation of Actions Act 1958 (VIC), Limitation of Actions Act 1974 in Qld, Limitation Act 1985 in ACT, and Limitation Act 2005 (WA), which impose a six‑year limitation period on simple contract debts. However, these limitation regimes do not apply to Commonwealth liabilities, including tax liabilities.
This distinction arises because Commonwealth debts are governed by federal legislation, not state or territory Limitation Acts. Because Commonwealth legislation overrides state laws in this domain, no state‑based limitation period can extinguish an ATO debt.
ATO’s legal obligation to pursue debts: Public Governance, Performance and Accountability Act 2013 (Cth) (PGPA Act 2013)
The powers and responsibilities of the Commissioner of Taxation are governed by the PGPA Act 2013 (Cth). This Act imposes a positive duty on the Commissioner to pursue outstanding taxation liabilities. Importantly, the Act contains no statutory time limit after which a tax debt expires.
The key points from the PGPA Act 2013:
Imposes a positive duty on accountable authorities to pursue debts.
Allows non‑recovery only if an Act authorises it, recovery is uneconomical, or the debt is not legally recoverable.
Only the Finance Minister can extinguish a Commonwealth debt unless another Act provides for extinguishment.
ATO administrative ‘Write‑offs’ do not extinguish debt: Practice Statement Law Administration – PS LA 2011/17. PS LA 2011/17 | Legal database
In some cases, the ATO may decide that pursuing a tax debt is uneconomical. When this happens, the debt is administratively written off or placed “on hold”. The important distinction is that this does not mean the debt has been released or extinguished.
Effectively, the Commissioner does not have the power to permanently “write off” liabilities relating to taxation, particularly in respect of a corporate taxpayer, and only in relation to certain liabilities in the case of approved hardship for individuals. Any “write off” of liability is effectively an agreement not to pursue at that time and remains on the ATO’s system waiting to be reinstated for collection at a later time.
Written off as “uneconomical to pursue” is not waived or legally extinguished. The Liability is placed “on hold indefinitely and can be re-raised at a later point in time”. If a debt is reinstated, General Interest Charges (GIC) may be retrospectively added once a debt is reinstated.
“If a decision is made to not pursue a debt on the basis that it is uneconomical to pursue, the debt can be re-raised on a taxpayer's account at a future time. A debt that is irrecoverable at law is effectively extinguished.” (Practice Statement Law Administration – PS LA 2011/17. A.2 – Making a decision not to pursue)
ATO policy on debt release (PS LA 2011/17)
The ATO’s official policy document PS LA 2011/17 – Debt Relief, Waiver and Non‑Pursuit explains the limited grounds upon which a tax debt may be released.
The ATO’s public guidance summarises this clearly:
Release is available only in cases of serious hardship.
Only specific categories of tax debt qualify.
There is no reference to expiration by time.
The ATO website states:
“We can only release you from payment of particular tax debts where paying those debts would leave you unable to provide for yourself or your family.”
This confirms that hardship, not time, is the relevant factor for debt release.
Why this matters
Understanding the unique nature of Crown debts is essential for advisors and clients to make informed decisions:
Most ordinary liabilities may become statute-barred after six years under state-based legislation.
Commonwealth (ATO) debts do not expire or become statute bared because of the passing of time.
ATO debts may be reinstated decades later and applied against future credits or refunds or pursued once an entity or individual has re-established itself.
Only formal mechanisms can extinguish federal tax debts.
Individuals:
Bankruptcy; or
Personal Insolvency Agreement; or
Formal hardship relief (if approved in certain circumstances and only relating to some forms of liability)
Corporate:
Liquidation.
Deed of Company Arrangement; or
Small Business Restructuring.
