The way the ATO tackles outstanding tax debts owed by SMEs has been under scrutiny recently, with some of the hard-line tactics employed by the ATO coming in for particular criticism.
The tax watchdog, the Inspector-General of Taxation (IGT), released a report back in July highlighting the burden being placed on SMEs in particular and since then there has been a steady stream of comment from accountants and insolvency practitioners shining a spotlight on individual cases where the ATO has taken a tough approach in relation to collecting tax debts.
The main contributors to so-called collectable tax debt are small and medium sized businesses.
Since 2010, the amount of small business collectable debt has increased by approximately $1 billion each year through to 2012–13 and by more than $2 billion in 2013–14.
Small business debt now represents about 60 per cent of total collectable tax debt, which currently stands at just under $21 billion.
Garnishee notices are one of the most common forms of firmer recovery action used by the ATO, with over 200,000 notices issued between 2011–12 and 2013– 4 and insolvency practitioners reporting that the numbers have increased further since then.
Garnishee notices are issued to either a person or business that holds money for that business or individual (typically, to banks which hold an account for the individual or business) and it compels them to make payments directly to the ATO to reduce the person or business’s debt.
Whilst recognising that such notices can play a part in the ATO’s debt management strategy, the IGT was critical of many of the governance arrangements around the issuing process, observing that very junior tax office staff are authorised to issue garnishee notices for significant amounts (up to $50,000) without sign-off from more senior operatives.
This has led to calls both for more training for tax officers to ensure garnishee notices are used appropriately and for greater levels of oversight by senior staff.
If your business happens to be hit with one of these garnishee notices, your business’ bank accounts can be frozen as soon as the bank receives the request from the ATO.
However, it can take several days for the business itself to find out a garnishee notice has been issued and in the meantime, the cash that was there to pay employees and suppliers is taken by the ATO.
There has also been concern about the rise in the use of director penalty notices.
Between 2011–12 and 2013–14, the ATO issued over 27,000 DPNs primarily to directors of small businesses. About 21 per cent of these taxpayers have become insolvent following the issuing of a DPN.
With the government short of cash, it appears that SMEs are being targeted to help fill the coffers.
Of course, the ATO would argue – with some justice – that the way to avoid such crippling tactics is to pay your tax on time or enter into a payment arrangement.
Mark Chapman is the director of tax communications at H&R Block, and a former senior director of the ATO.