In a June 2021 report titled “Investigation and Exploration of Undisputed Tax Debts in Australia” (the Report), the Australian Taxation Office (ATO) provided taxpayers with insight into the current tax landscape in Australia. ATO debt recovery is vital for business owners and regular taxpayers to understand.
The report provided significant detail including a breakdown of tax debts, among which, was a focus on small to medium enterprises (SMEs). While the statistics within the Report are staggering, we urge SMEs to be proactive in their approach to ATO liabilities.
The Report Findings – Small to Medium Enterprises
As of the end of Financial Year ending 30 June 2020, SMEs accounted for $21.4b of the $34.18b (62.6%) in national tax collectable tax for that year. Notably, the construction industry accounted for $7.2b of collectable debt (21% of total collectable debt by industry). This is a significant increase from the approximate $5b owed by the construction industry in Financial Year ending 30 June 2018.
The above statistics highlight the importance of SMEs getting timely advice before a tax debt becomes an issue. Given the implications the COVID-19 has had on businesses by way of lockdowns, tax relief and stimulus payments (i.e. JobKeeper), a keen eye will be kept on the ATO’s debt statistics in anticipation of further growth.
ATO Enforcement Action
In the Report, the ATO considered taxpayers utilizing payment arrangements as a good sign of a “healthy tax system”. Despite this, the ATO reported a decline in taxpayer use of this mechanism for settling tax debts.
By comparison, the take-up of payment arrangements can be summarized as follows:
| Financial Year | Debts in Payment Arrangement ($) | Total Collectable Debt ($) | Per cent of tax debt in payment arrangement |
| FY 18 | 4.4b | 15.1b | 29% |
| FY 19 | 4.6b | 16.5b | 28% |
| FY 20 | 2.7b | 21.4b | 12% |
According to the Report, the ATO may require businesses with tax debts to undergo a “Business Viability Assessment”, whereby the ATO will ask qualifying questions regarding a business’s profitability, ability to meet commitments to creditors, and the implication a payment plan may have on a business’s cashflow within a period of low or nil profitability. This assessment may be used to determine if it is appropriate for a business to enter a payment plan for tax debts. Key considerations under the assessment regime include whether the business has complied with previous lodgment and payment due dates, whether there are any defaults on previous payment plans, and whether there are any current negotiations in relation to tax debt.
Businesses should exercise due caution in this regard, as entering a payment plan will provide the ATO with significant insight into trading practices as well as cash flow, asset and liability position, liquidity, debtor and creditor position, and funding availability. In parallel, these factors are often used as indicators of a company’s solvency, or lack thereof, and may provide the ATO with some incentive to commence wind-up proceedings if there are limited prospects of repayment.
It was reported by Accountants Daily that, despite the current climate of lockdowns, the ATO are continuing their enforcement activities for outstanding debt and lodgments. This means businesses may still receive warning letters, demands and penalty notices from the ATO. If ignored, the consequences of such action by the ATO can result in further action by the ATO, including the proceedings to wind up the tax owing company in insolvency or the issuing of Director Penalty Notices.
For more info on how to deal with Director Penalty Notices from the ATO, see our article ‘What is a director penalty notice and what does it mean for you as a Director?’
How Should You Respond?
Given the rise in collectable debt payable to the ATO, directors of businesses need to be prepared to be able to respond to ATO debt recovery demands and understand their options. RCR are actively assisting clients in negotiating with the ATO and creditors, as well as proposing and effecting Deed of Company Arrangements and Debt Agreements. For more info on insolvency law, see our article “Insolvency – The Ultimate Guide”.
At RCR, we urge our clients to be proactive rather than reactive in the context of Company solvency, debts, and creditors. To save yourself and your business the stress of ATO debt recovery or creditor enforcement, contact us online. Alternatively, contact our Brisbane Lawyers on (07) 3009 8444 or by email at [email protected] or our Sydney Lawyers on (02) 9307 8900 at [email protected].
The blog published by Rostron Carlyle Rojas is intended as general information only and is no legal advice on any subject matter. By viewing the blog posts, the read understands there is no solicitor-client relationship between the reader and the blog published. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.
