The ATO’s toolchest to recover tax debt

A timely reminder. 

For readers who attended our recent Worrells seminar “Asset Exposure in Insolvency”, they heard our fantastic presenters speak about the insolvency practitioner’s toolchest for recovering assets for creditors’ benefit. 

With this theme in mind, here’s a timely reminder that by far the largest creditor in our economy, being the Australian Taxation Office (ATO), has its own set of tools to ensure it continues to be paid. 

For the 2022 financial year, the ATO revealed[1] that it was owed a whopping $66.6 billion. While the most current numbers are not yet available, there’s every expectation this number has increased somewhat considerably, or a larger portion of that number will represent unrecoverable debt due to the taxpayer’s insolvency. 

The ATO employed four key tools to manage this debt and encourage business to take steps to repay it. They were:

1. Payment plans­—allows tax liability paid over time. Over 100,000 warning letters were sent to directors, requesting they engage with the ATO.

2. Director penalty notices—approximately 18,500 director penalty notices (DPN) were issued to directors, about their personal liability for their company’s unpaid PAYG, GST tax debt, and SGC amounts.

3. Credit reporting—over 700 businesses were disclosed to credit reporting agencies for being in default with the ATO for debts totalling more than $100,000. This potentially makes it more difficult for a business to obtain finance or rolling over existing finance more expensive.

4. Wind up notices—taking steps through the courts to wind up a company to recover its tax debts. Unless the debt is paid in the process, it eventually results in a liquidator being appointed to sell the company’s assets, investigate what led to its failure, and distribute any surplus funds to creditors.

The ATO reported[2] that this collection activity efforts related to $17.3 billion of outstanding tax debt and resulted in:

• only $714 million being paid (or 4%)

• $5.4 billion (or 31%) entering into a payment plan.

Put simply, the vast majority of those the ATO contacted, just didn’t respond to the warnings or DPNs.

At that time, the ATO expressed it was taking a “timely and tailored approach to client’s debts, with its primary strategy being to engage, communicate, educate, and assist clients” with its main focus being on:

• Small business clients with superannuation guarantee charge (SGC) debts, and clients with the largest debts.

• Ensuring taxpayers complete their lodgments even if they are unable to pay the associated liabilities.

• Having transparency of the client’s debt position, enabling the ATO and the client to reach an agreed payment plan in a timelier manner.

• Encouraging clients to engage with the ATO about their circumstances early.

• No matter at which point in the process, the ATO will work with clients to get the best outcome to assist them in meeting their obligations.

Where clients failed to work with the ATO or take initiative to resolve their situation appropriately, it was business as usual and the ATO would take further recovery action.

It begs the question: is the current process really working or is the problem so large that the ATO will need to take further steps to deal with the issue? If so, what could that include?

We are already seeing a substantial increase in ATO winding up activity and DPNs. However, somewhat interestingly, one recovery tool that appears to be underutilised is the ATO garnishee notice. This is where the ATO garnishees taxpayers’ bank accounts, debtors, and other amounts owing to taxpayers as another way to recover its debt.

With a potential for a huge portion of the ATO’s debt soon to be reported as non-recoverable due to insolvency, will the ATO’s current attitude to collecting debt change considering our current rates of inflation, cost-of-living pressures, and whispers of a recession? Time will tell, although herein lies the adage—the longer you leave a problem before you deal with it, the more difficult it becomes to resolve.

Related articles:

ATO garnishee notices: can stop businesses in its tracks | Worrells

The ATO’s current debt recovery strategy | Worrells

[1] ATO Annual Report: 2021-22

[2] Accountants Daily, ATO figures reveal final 2022 DPN tally.