Inspector-General of Taxation - Report on ATO's Debt Recovery

As we reported earlier (see below), and as reported in the latest issue of the ARITA journal, we gave feedback to the Inspector-General of Taxation’s (IGT) review into Debt Collection by the Australian Taxation Office.  Our focus was more on the fact that tax debt was not being well enough collected often resulting in large unpaid tax liabilities of companies entering insolvencies. 

The IGT has now publicly released his Report of this review.

ARITA is examining the detailed comments about ATO debt collection and the insolvency issues raised in the Report. 

Some issues ATO takes into account in voting

At this stage, we extract this useful statement of what the ATO takes into account in deciding whether to vote in favour of alternative agreement or arrangement to a formal insolvency.

[1.116] In deciding whether to vote in favour of alternative agreement or arrangement, the ATO expects its staff to consider, amongst other things:

• any legal advice that was obtained by the ATO;

• the contents, comprehensiveness and adequacy of relevant reports as to the statement of affairs, the proposal and the report prepared by the trustee or administrator;

• any liabilities not yet established, such as unissued assessments;

• whether the debtor has made appropriate arrangements to meet future tax liabilities and the likelihood that the proposals put forward would be achieved;

• the taxpayer’s compliance history, including the extent and seriousness of any taxation offences which may have been committed;

• any association between the debtor and other creditors; • other matters that are considered to be of public interest; and

• the tangible benefit to the Commonwealth revenue that is expected to be gained from any proposed arrangement.

Taking insolvency action, and outcomes

A table in the Report shows that the majority of insolvencies are not initiated by the ATO. Where the ATO does initiate insolvency, it initiates more company liquidations than the bankruptcy of individuals.  A further table shows

“that the ATO generally receives very little as a result of insolvency actions and shows that most insolvency action relates to small businesses and individuals”.

Impact on other creditors

The Report considers the ATO's strong garnishee and director penalty powers.  The broader impact of the ATO’s debt recovery actions on other creditors is also considered in the Report.

“Such impact may occur where taxpayers are either unable to pay their creditors or make delayed payments. The delayed or non-payment may, in turn, cause financial difficulties for their creditors. Indeed, a third-party survey reported that many small businesses have entered some form of insolvency administration. In another survey, over one-third of respondents had a supplier or customer who was unable to pay creating a domino effect of financial difficulty. Accordingly, the IGT is of the view that the ATO has a role to support the broader economy in terms of the impact of its action on third party creditors. In this respect, the IGT has recommended that the ATO should develop improved metrics to better assess its performance and the benefit to the economy”.

ARITA

ARITA is reviewing the Report in detail.  Any member comment or assistance is welcome, to Michael Murray.

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ARITA's submission of 18 July 2014 queried whether the ATO acts with sufficient vigour in pursuing debts, with a number of practitioner members reporting that liquidations, for example, often reveal large and long-standing tax liabilities. 

Our submission said that good tax compliance is a matter of good corporate and business conduct and a safeguard against potential director liability for personal liability under the tax regime, and for insolvent trading.  Unpaid tax liabilities are a common indicator of insolvency. 

This issue arose at the BILS "Insolvency and the Tax Man" conference at the University of Adelaide on 25 July 2014, which our Technical Director, Kim Arnold, attended. 

As to one issue, at the presentation on tax and Part 5.3A, Kim reports the ATO's comment that it only votes against DOCA proposals where there are transactions that the ATO thinks should be investigated in a liquidation.  Kim raised the question whether the ATO would provide funding to investigate those transactions where it votes against a DOCA and the liquidator is without funds to be able to take any action. 

ATO's PSLA 2011/16 - Insolvency - collection, recovery and enforcement issues for entities under external administration - says that one factor, of many, it takes into account in voting on a DOCA is "matters that are considered to be of public interest or which reasonably question the fairness and appropriateness of voting in support of proposals, particularly where the consequence of those proposals is the removal of statutory powers of investigation, examination or the ability to clawback assets or funds". 

Member comment is invited to Michael Murray.