The ATO Debt Dilemma
Late last year, thousands of taxpayers and their agents were advised by the Australian Taxation Office (ATO) that they had an outstanding historical tax debt. The only problem was, many had no idea that the tax debt existed.
The ATO can only release a taxpayer from a tax debt in limited situations (e.g., where payment would result in serious hardship). However, sometimes the ATO will decide not to pursue a debt because it isn’t economical to do so. In these cases, the debt is placed on hold, but it isn’t extinguished and can be re-raised on the taxpayer’s account at a future time. For example, these debts are often offset against refunds that the taxpayer might be entitled to. However, during COVID, the ATO stopped offsetting debts and these amounts were not deducted.
In 2023, the Australian National Audit Office advised the ATO that excluding debt from being offset was inconsistent with the law, regardless of when the debt arose. And by this stage, the ATO’s collectible debt had increased by 89% over the four years to 30 June 2023.
The response by the ATO was to contact thousands of taxpayers and their agents advising of historical debts that were “on hold” and advising that the debt would be offset against any future refunds. These historical debts were often across many years, some prior to 2017, and ranged from a few cents to thousands of dollars. For many, the notification from the ATO was the first inkling they had of the debt, because debts on hold are not shown in account balances as they have been made “inactive”. In other words, taxpayers were accruing debt but did not know because the debts were effectively invisible due to being noted as “inactive.”
In a recent statement, the ATO said: “The ATO has paused all action in relation to debts placed on hold prior to 2017 whilst we review and develop a pragmatic and sensible way forward that takes into account concerns raised by the community.
It was never our intention to cause frustration or concern. It’s important to us that taxpayers have trust in our tax system and our records.”
For any taxpayer with a debt on hold, it is important to remember that just because the ATO might not be actively pursuing recovery of the debt, this doesn’t mean that it has been extinguished.
Small business tax debt blows out
Out of the $50bn in collectible debt owing to the ATO, two-thirds is owed by small businesses. As of July 2023, the ATO moved back to its “business as usual” debt collection practices. For entities with debts above $100,000 that have not entered into debt repayment terms with the ATO, the debt will be disclosed to credit reporting agencies.
What should you do if you have a tax debt with the ATO?
If you have a tax debt that you are unable to pay in full we recommend early engagement with the ATO to address payment options. Not engaging and just hoping the problem goes away will only make things worse. As tax agents, Marsh & Partners can assist with this and negotiate a solution on your behalf.
In addition, the ATO advises businesses with a tax debt to take the following steps to address it:
- Ensure all accounting entries are up to date;
- Ensure all BAS and IAS are lodged by the due dates;
- If you have an overdue debt with the ATO, contact them immediately to discuss a payment plan;
- If a tax debt is in dispute, communicate with the ATO to resolve the dispute.
We’re here to help
For more information and guidance on meeting your tax obligations, please contact us. With our expert help, you’ll have peace of mind that you are ticking all the right boxes and avoiding any risk of non-compliance.
You can find out more about working with Marsh & Partners here. As your Absolute.Account.Ability partner we’re on a mission to make your business life better. We’ll help you set goals for your business, devise an Action Plan to make them happen and meet with you regularly to ensure you stay on track.
