The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) conducted a review of tax disputes involving small businesses that had gone before the Administrative Appeals Tribunal (AAT).
Its report on the findings, released on Monday (29 April), sided with the business community in determining that, far from being a measure of last resort, garnishee notices had been used “in a sizeable number of cases”.
“We found ATO debt recovery action occurred in at least 12 per cent of cases before the AAT, severely impacting a small business’s resources to prosecute its case and carry on its business,” Ombudsman Kate Carnell said.
“Strong forms of debt recovery action by the ATO, such as garnishee notices, can destroy a small business because it effectively strips funds from a small business’s bank account.
“Consequently, the small business is not able to pay wages, rent, suppliers or bank loans and the follow-on effects of this — bad reputation, no credibility and potential bankruptcy — is significant.”
She added: “Despite the devastating impact on small businesses, the ATO alone has the authority to produce garnishee notices without any external oversight.”
In light of the findings, Ms Carnell called on the ATO to immediately cease debt recovery action against any small business with a dispute currently before the AAT.
“ATO garnishee notices must be actioned only with appropriate oversight and approval, such as the court system, before an order can be issued,” she said.
“The asymmetry in power between this large and powerful organisation and the small business sector has left these particular small businesses in a vulnerable position and with diminished access to justice. They simply don’t have the same resources to fight where there is a legitimate dispute.”
Ms Carnell also said that SMEs with disputes involving ATO decisions now have the option of using the new Small Business Concierge Service through her office.
“Our case managers help them understand the AAT process; they get an hour with a small business tax lawyer at a cost of $100 and an additional hour free if they decide to go ahead with the appeal,” she said.
Ombudsman makes recommendations for change
In the official report, the ASBFEO said that debt recovery action by the ATO happens “in a sizeable number of cases which appear before the AAT (at least 12 per cent)”.
And, it said, such action can have devastating — even fatal — consequence on businesses.
“Such action can severely impact a business’s ability to prosecute its case and carry on its business. In particular, the use of garnishment (specifically enduring garnishee notices) can have a crippling impact on businesses,” the report said.
“This is especially true when the first knowledge of a garnishee notice is the bank not honouring payments such as wages, rent, suppliers’ invoices or even loans.”
It went on to state that “the ATO choosing to issue a garnishee notice causes immediate harm to a small business as it removes funds from the taxpayer’s bank account, limiting their ability to pay wages, suppliers, rent and other operating expenses and catapulting the business into a state of technical insolvency”.
“An ‘enduring’ garnishee notice, which can often last for three months, paralyses a small business by effectively freezing their bank account, making survival practically impossible without the administrative burden of changing banks and notifying customers.”
The report made three bold conclusions based on its findings:
- That stronger debt recovery action by the ATO kills small businesses.
- ATO debt recovery action needs to be proportionate, fair and consistent.
- The ATO does not engage with small business in the same ways that it expects small business to engage.
In a bid to instil change in the Tax Office’s approach to debt recovery from small businesses, the report made seven key recommendations:
- Small business must be able to seek a stay order of any ATO debt recovery action when before the AAT: This would match the stay orders available to the AAT when hearing other, non-tax-related matters.
- Garnishee notices must have mandated external oversight and approval.
- Other forms of security should be used instead of garnishees: This could include a Mareva injunction or caveat on property so as not to restrict the business’s cash flow.
- Settlement deeds for matters before the AAT should be published by the AAT, to bring both transparency and accountability to the ATO.
- The ATO must offer the range of internal dispute resolution options and have small business acknowledgement before legal recovery action commences. “If resolution by these internal review processes fails then formal acknowledgement must be obtained from the small business prior to legal recovery action commencing,” the report said.
- For any small business tax debt (disputed or not), adequate opportunity must be provided to pay, aligned with cash flow of the small business. This would provide more flexibility to the current “arbitrary” two-year limit on repayments.
- The ATO should continue and expand its current independent review process for small business after the pilot program finishes. The 12-month pilot began on 1 July 2018 to offer an independent review of disputed income tax audits to eligible small businesses.
The report also called for more investigation to be carried out, including broadening the scope to examine ATO debt recovery outside of those disputes making their way to the AAT, examining the timeliness and clarity of tax law for small businesses, as well comparing Australia’s tax dispute procedures with those in other English-speaking countries.
‘We are talking about low numbers’: ATO
ATO commissioner Chris Jordan issued a statement in response to the ASBFEO’s findings, in which he said that the Tax Office would “give consideration” to the recommendations tabled.
However, he cautioned that the cases represent “low numbers” proportionate to the total number of small businesses paying tax.
“We are talking about low numbers here. There are 3.8 million small businesses in Australia, and I want to ensure that that these figures are not extrapolated or manipulated,” Mr Jordan said.
“These are cases that went to the AAT, and as such have unique characteristics, that do not reflect the broader small business population.”
The tax commissioner’s full statement is copied below:
Today the Australian Small Business and Family Enterprise Ombudsman released their review of our debt recovery action for small businesses in dispute with us at the Administrative Appeals Tribunal during 2017–18.
Our primary concern is to ensure that Australian small businesses are not alarmed by this report. Of the 108 small business cases finalised in the AAT in 2017–18 there were only 17 cases identified where some type of debt recovery activity occurred. We took garnishee action in just 4 cases, and pursued debt in other ways (for example a letter or a call) in a further 13 cases.
We are talking about low numbers here. There are 3.8 million small businesses in Australia, and I want to ensure that that these figures are not extrapolated or manipulated. These are cases that went to the AAT, and as such have unique characteristics, that do not reflect the broader small business population.
The fact is that collectively, small businesses owe $15 billion in tax debt, which accounts for almost two thirds of all debts owed. This is growing year-on-year and we have a legislative responsibility to collect tax debt. When a customer of a small business pays GST on a purchase, or when an employee of a small business sees income tax withheld from their pay packet, it is our job to ensure that the tax is passed on, as this was never the small business’s money.
In 2017–18, of the cases that went to the AAT almost $5 million was owed by the four taxpayers who were the subject of a garnishee while before the AAT. This includes one taxpayer who alone owed almost $2.5 million in tax debt. In this case we successfully garnisheed approximately $181,000 from the proceeds of a property sale.
This approach reflects our long standing policy on debt recovery for cases in dispute at the AAT: we will only pursue disputed debt in exceptional circumstances. For instance, where there are links to organised crime, phoenixing, evasion or other fraudulent activity, or where we have evidence of the taxpayer dissipating assets or transferring funds to frustrate collection of tax. In some cases we may pursue a component of undisputed debt while a separate disputed component is before the AAT.
The four cases where garnishee action was taken were highly unusual. One of the matters involved a tax agent with a chequered history of fraud and evasion, on top of non-compliance, overdue lodgments and undisputed debt of over $100,000. The tax agent was believed to have gambled away over $300,000, refused to return our calls and letters, and failed to provide evidence. It is clear given these circumstances why garnishee action was appropriate.
Another one of these cases was referred to the ATO by Australian Customs and Border Protections Services and involved evidence of engagement in criminal activity by the taxpayer. During the appeal process the taxpayer started hiding assets which led us to issue a garnishee.
We tabled our full submission to the ASBFEO review at Senate Estimates including details of our actions.
I note there are seven recommendations and we will give consideration to these, in the context of our role in finding the balance between ensuring we support honest businesses exercising their dispute rights, while not rewarding deliberate non-compliance.
Any small business taxpayer who is struggling to meet their payment obligations can call the ATO to negotiate a payment plan, or set one up online if the debt is less than $100,000. In 2017–18 $4 billion in small business debt was being paid through payment plans.
Managing tax debts and disputes are complex endeavours, and we are always looking to improve. This is why in 2018 I asked the ANAO to come and review the way we manage tax debts for small businesses. I look forward to the ANAO’s report, and to our continued work in this space.