As part of our monthly webinar series we were thrilled to be joined by two guest speakers from the ATO. Anita Challen (Assistant Commissioner) and Jason Aitchison (Director) were able to give us a clear insight into the current position with outstanding ATO debt and their recovery efforts. There has been a lot of speculation and opinions thrown around in the press lately, so there is nothing like getting current information direct from the ATO. Some of the messages we heard were so important we wanted to share them with all our valued referral partners.
What is the current situation?
In very rough and general terms the ATO is currently owed around $60bn. Of this amount, around 75% has been self-assessed by the taxpayers through their normal lodgements. Out of the $60bn, around $40bn is considered collectable. The remaining $20bn is owed by taxpayers that are already insolvent, or the debt is being disputed. This is a lot of money, and it is in everyone’s best interests that the ATO recovers as much of this debt as it possibly can. We all need hospitals and roads and all the other social services our tax dollars go towards.
So, there is $40bn that the ATO considers collectable. This amount has grown by around 50% during the covid period. How does this break down? In rough terms it looks like this:
2/3 is owed by small business.
Of the amount owed by small business 2/3 relates to BAS lodgements.
The ATO understands that some portion of this debt will fall into their insolvent bucket at some point.
Clearly, small businesses and their owners are exposed to significant risk when they have outstanding tax debts that are not under an agreed payment plan with the ATO.
How did we get here?
A 50% increase in the outstanding collectable tax debt is massive. This has largely been a result of the suspension of legal recovery action by the ATO during the covid pandemic. Prior to the pandemic, there were around 10,000 external administrations per year. During covid this dropped to 6,000 and a major contributing factor was the understanding and forbearance shown by the ATO. To support Australian business and the economy the ATO put all recovery action on hold.
With no pressure from the ATO many taxpayers did not address their tax and other debt obligations. Government stimulus money further supported businesses and helped keep many alive that otherwise would have ceased. Many of these businesses are still out there and might be what have been dubbed “zombie” companies.
Where is it going now?
Anita and Jason were able to share their insights into the ATO’s current processes. Interestingly, from the ATO’s perspective, there has been little change. It is simply the case that all recovery action has to start from scratch. Pre-pandemic, the ATO was engaging with taxpayers on an ongoing basis and had debts at certain stages of the formal recovery process. So, there would have been a percentage of debt that was under payment plans, Director Penalty Notices (DPNs) would have been going out regularly, some taxpayers would have received a Creditor’s Statutory Demand and some would be facing the appointment of an external administrator.
Now that the ATO has resumed its recovery efforts everything has to start all over again. The ATO sent out awareness letters to thousands of taxpayers, either advising them that they may receive a DPN or that their ATO debt may be reported to credit reporting agencies. Fair play to the ATO – nobody could say that they did not give taxpayers an opportunity to address their debts and a fair warning.
During June the ATO was issuing around 100 DPNs per day. This has now increased to around 300 DPNs per day. This is an unprecedented level, but it must be remembered that there had been virtually none issued for two years, so it makes sense that this has now ramped up significantly.
The ATO had expected more taxpayers to have entered into external administration by now. A DPN can be a significant motivator for a director to voluntarily put the company into liquidation. This has not happened at the rate that might have been expected. The ATO advises that there is a significant amount of debt that is still not under a payment plan or management plan with the ATO.
The ATO expects that the number of insolvencies will increase in the coming months. In July 2022 there were 131 companies put under external administration. The ATO initiated only 2 of those. Now that the ATO has recommenced formal recovery action the flow of formal insolvencies is definitely expected to increase.
What were the key messages?
Some of the key observations from our guest speakers from the ATO were as follows:
The ATO is not here to act as a financier or 2nd overdraft to small businesses, as this may create an unfair advantage over taxpayers that do meet their obligations. This means the ATO is unable to support an individual business over a long period of time.
The ATO posed the questions;
Does a business have other creditors at 90 days+ overdue?
What would a bank or lender do if a loan was 90 days+ in arrears?
The ATO strongly recommended that accountants, bookkeepers and other financial advisors have that tough conversation with their clients now. It was stressed that it is better for the taxpayers to stay in control of the insolvency process rather than forcing a creditor, such as the ATO, to push them. Our speakers from the ATO urged taxpayers to speak to their trusted advisors about their options in dealing with their tax debt and acknowledge that some of the debt they have in their collectable bucket may actually turn out to be insolvent.
In many ways, in our opinion, the future is going to end up looking like the past. Remember what the ATO was like before the pandemic? They are there to collect outstanding tax debts. They are going to do all the things they used to do – it is just early days now, but they have recommenced their recovery efforts.
Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies.
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