In the past 7 months, the ATO have initiated approximately 476 winding up proceedings to attempt to collect some of the $30 billion they are owed in overdue small business tax. This is noteworthy given the ATO initiated just 14 in the same period last year. This shift demonstrates the ATO's return to pre-pandemic debt recovery strategies and a departure from their lenient approach.
The Court actions are consistent with the ATO's 2023-24 Corporate Plan.
The ATO releases an annual Corporate Plan to guide their operations relating to administering Australia's tax system. In addition to a more aggressive enforcement posture, the Corporate Plan also covers cybersecurity, protecting the system and clients against fraud and superannuation guarantee integrity, and improving small business tax performance.Georgina Adair, Maddocks Lawyers
Each year the ATO releases its corporate plan for the financial year ahead. The corporate plan acts as the ATO’s primary planning document and outlines key focus areas and priorities.
For the 2023-24 year, the corporate plan identified 8 ‘key focus’ areas considered to be strategically important for the ATO in the year ahead. Amongst those 8 areas, two are particularly relevant to small business operations and their tax debts, being to ‘Improve small business tax performance’ and ‘Address collectable debt’. For the reasons set out below, the two focus areas include complimentary measures representing a ‘carrot-and-stick’ approach to driving small business tax compliance.
The "carrot": Improve small business tax performance
The ATO intends to improve small business tax performance with a digital first approach. This will be done by encouraging enhanced integration that supports high-quality, system generated tax guidance to minimise errors, increase confidence and promote right-time reporting and payment.
In particular, the ATO have identified the following key deliverables to improving small business performance:
The above measures are the ATO’s way of offering positive incentives to drive small business tax compliance. The ATO thinks these ‘quality of life’ improvements will be welcomed by the small business community who will benefit from a streamlined approach to tax reporting.
The "stick": Address collectable debt
On the other hand, the ‘address collectable debt’ focus area sets out the ATO plans to take decisive and swift action with businesses who are choosing not to engage and purposefully avoid tax repayment obligations.
The key deliverables for the ATO in this focus area, being to:
Highlighting the centrality of this key focus area, the Commissioner of Taxation stated in his foreword that the ATO intends to "...keep up momentum to engage with taxpayers to ensure they meet their obligations where they have outstanding debt..."
The question then is how willing is the ATO to rely on the ‘stick’ approach to driving compliance. Having regard to the ATO enforcement activity to date, the answer is becoming increasingly clear.
Winding up proceedings against company taxpayers are initiated by way of a statutory demand. Following delivery of such demand, a debtor company will have 21 days to either pay the debt, or get the statutory demand set aside by the court. Non-compliance with a statutory demand creates a legal presumption of insolvency, forming the necessary conditions for a wind up order. A winding up order, is a court order that requires a debtor company to cease trading, so its assets can be sold to pay its creditors.
Prior to COVID-19, the ATO often utilised winding up proceedings to recover tax debts. Whilst it wasn’t the only strategy, the ATO was known to be a prolific user of the courts. During the pandemic, the ATO instead sought to work more closely with businesses and minimise any litigious recovery action.
Whilst offering and allowing concessions was essential for the continuation of many businesses, especially small businesses during the pandemic, at 30 June 2022, small business collectable debt sat at $29.3 billion. The total collectable tax debt was $44.8 billion at the same time, a 69% increase since 30 June 2019
More recently, the ATO have returned to the courts as a principal way of recovering tax debts. 476 winding up proceedings were initiated in the first seven months of 2023. This pales in comparison with the 3 corporate windups initiated between 1 July 2020 and 31 March 2021, but is still down on the 950 that were initiated in the first seven months of 2019.
The decision to recommence pre-COVID strategies for debt recovery has not been taken lightly and the ATO has assured businesses of their intention to continue to offer help and assistance to small businesses who genuinely need it, with the condition that such businesses honestly and proactively engage and communicate with the ATO. There is still opportunity for cooperative businesses to enter into fair commercial arrangements with the ATO where they are genuinely struggling with the repayment of debts.
Small businesses with outstanding debts may take some comfort from the fact the ATO still intends to on engage in payment plan negotiations. That being said, intentional and proactive engagement will be important to avoid the initiation of winding up proceedings.
Many small businesses were artificially kept from becoming insolvent during the pandemic, and now the ATO is sending a clear message: there is a need for accountability, these taxes have been incurred and they need to be collected.
For more information, contact Maddocks on (03) 9288 3555 and ask to speak to a member of the Commercial Practice Group.
Andrew is a Partner in the Maddocks Tax & Revenue team.
Andrew provides advice on:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Andrew was a tax consultant at a Big 4 Chartered Accounting Firm.
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