The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has completed its review of Australian Taxation Office (ATO) debt recovery action. Prompted by sensational (and ultimately unfounded) 2018 media reports of ATO ‘cash grabs’ and garnishee notice KPI’s[i], the review focussed on debt recovery commencing or continuing when a dispute was before the Administrative Appeals Tribunal (AAT). The report concluded that strong debt recovery occurred in 12% of cases before the AAT – a “sizable number”[ii] – and that strong debt recovery “kills small business”.
But these claims need to be unpacked in the light of good hard data.
Firstly, let’s look at the scale of the problem. In the 2017-18 financial year: 3.8 million registered small businesses (including sole traders) lodged 5.4 million tax returns and 12.2 million activity statements; the ATO conducted 121,000 audits and 9,000 default assessments; 143 small businesses took a taxation matter to the AAT; and in 17 of those 143 cases (here’s the 12% referred to by the ASBFEO) debt recovery action was initiated (3 cases) or commenced prior to, and continued, during the appeal[iii]. 17 cases – hardly a “sizeable number”.
Next, how many garnishee notices were issued while cases were before the AAT? A total of 4.
In its submission to the ASBFEO review, the ATO asserted that debt recovery action during an active dispute only occurs where taxpayers have repeatedly failed to engage with the ATO over outstanding debts, and firm or strong action where there is evidence of fraud, illegal phoenixing, serious tax evasion and dissipation of assets and funds, as was the case in 3 out of 4 cases where garnishee notices were issued. In the fourth case where a garnishee was issued, $2000 was collected due to an error – a disputed debt indicator had not been set. However, the AAT appeal ultimately confirmed that the taxpayer did indeed owe $100,000 to the ATO.
With over 20 years’ experience in small business restructure and insolvency, Shaw Gidley director Paul Gidley has a different view of the ATO’s debt recovery process. We took the opportunity to have a brief Q & A with Paul about this issue:
What is your experience with ATO debt recovery for small business?
PG: Simple, the ATO is not acting early enough in the collection curve particularly now that they have the technology to do so. Accruing tax and superannuation liabilities are often a symptom of chronic insolvency and in some cases hand in pocket fraud. Repeated payment arrangements prolong the pain, make recovery more difficult and expose more innocent trade creditors to losses when the business ultimately fails. Further there doesn’t appear enough rigour in the analysis of financial data supporting instalment payment plans for aged payable. Sure they use sophisticated analytical software however the output is only as good as the input.
The ASBFEO review claims that the ATO acts too aggressively and “kills small business”. What do you see happening?
PG: I assume that the ATO subscribes to the basic principle of business turnaround that is allow business to survive so we maintain the value in our economy by preserving trade and assets. The goal is to keep the business going so that profits are made, taxes are paid, jobs retained, and everyone involved keeps earning and spending, fuelling the economy. For most if not all small business, profitable trade is the secret to maintaining the value of their business assets. If the business isn’t trading profitably, the business is most likely accruing debt which can become unmanageable if left unchecked. The ATO needs to play a role in this process expertly scrutinising the financials supporting a request for an instalment plan. Business advisers also need to play a role by ensuring the causes of their clients existing underperformance has been resolved or in the process of being resolved. The financial models presented to the ATO need to have integrity, otherwise it is just delaying the inevitable. Advisers and the ATO need to know when they are flogging a dead horse, otherwise the economy suffers.
Won’t sacrificing under-performers cause job losses and economic downturn?
PG: Consider a micro-economy in a suburban shopping strip where you have 4 hairdressers for example. 3 are profitable, 1 is making losses, all competing for local trade. It’s likely that the losses of the underperformer have or will become insurmountable if left unchecked. The existence of the ailing hairdresser makes that entire micro economy inefficient and may result in some of the other hairdressers experiencing financial difficulty. By removing the underperforming hairdresser, the capacity and scarce resources it was employing inefficiently, driving up everyone’s cost of trade will in the majority if not in full migrate to the remaining hairdressers, improving their performance and value to the economy as more trade and scarce resources become readily available.
What would you like to see happening?
PG: A higher level of sophistication by the ATO when assessing financial model data supporting instalment repayment requests for aged ATO payable and a lower threshold to trigger collection activity. As for Business Advisers, I suggest they consider running the financial models past their preferred turnaround and insolvency expert – it may limit future losses to their client and the economy quite significantly. A fresh set of independent and critical eyes can add significant value to this process.
Despite the conclusions of the ASBFEO report, it appears that overly aggressive debt recovery is rare, occurs after numerous attempts at engagement by the ATO, and may not be pro-active enough to offer a genuine lifeline to viable small businesses.
Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.
[i] Australian Small Business and Family Enterprise Ombudsman (2019, April 24). Australian Taxation Office – enforcement of debt recovery.
[ii] Ibid p.4.
[iii] Australian Taxation Office (2019). ATO Submission. Review on early debt recovery action on a small business disputing a debt at the AAT. Retrieved from https://www.aph.gov.au/Parliamentary_Business/Senate_Estimates/Economics/2019-20_Budget_estimates/treasury