- A recent report by the Australian National Audit Office shows tax debt is growing faster than tax collections
- The ATO is taking steps to address this
- Is reform needed?
Tax debt is growing faster than net tax collections at a time when tax debt collection is being scrutinised increasingly by numerous government bodies.
Small business tax debt in 2017-18 was A$19.7 billion, according to the Australian National Audit Office (ANAO), and currently it is likely well over that figure.
The ANAO's recent report on the management of small business tax debt makes for interesting reading for Australian CAs as it outlines the changes the Australian Taxation Office (ATO) is making to debt management. There are three main changes you need to know about.
First, if your client has had a tax debt relating to a Business Activity Statement where there was previously a nil or credit balance, then you may have experienced Purposeful First Action (PFA).
PFA is a system that assesses taxpayers as they enter into debt and assigns them one of six "treatment pathways" based on their compliance history and past behaviour. The time taken to get to stronger action depends on the allocated pathway and can vary from 149 to 579 days. Pathway one is for taxpayers who receive a low risk rating and pathway six is for those with the highest risk rating, which may mean the taxpayer often lodges and pays late with many outstanding lodgements.
The ATO is continuously reviewing and modifying PFA. The latest iteration consolidated the number of pathways and inserted additional steps requiring the ATO to issue warning letters and have, or attempt to have, at least two telephone discussions with the taxpayer. The ATO says it is trying harder to contact the taxpayer before taking firmer and stronger action.
This is clearly a step in the right direction.
The ATO plans to intensify PFA by the end of the year, replacing the current "Debt right now!" pathway, which produces bottlenecks. So CAs may find their clients being moved more quickly to firmer and stronger action.
Another ATO initiative is Next Best Action (NBA), which aims to scan and analyse the entire debt population to determine the best next action by looking for trigger events such as escalating debt or defaulted payment plans that may indicate that a different pathway is required for a particular taxpayer. This is the same approach countries such as Singapore, Sweden, Finland, Belgium and Ireland are taking. NBA is currently at the prototype stage. It has been in at this stage for some time.
Lastly, the ATO's corporate plan 2018-19 has 'Payment Thinking' as a strategic initiative to make payment an easy and natural part of activities across all stages of tax and superannuation. Payment Thinking allows the taxpayer to see their tax position at all times and makes it easier to make online payments, especially voluntary ones. It builds on strategies used by the Swedish revenue authority and Canada's "Pay and get an emailed receipt" button in online portals.
A recent paper by Amanda Veit of UNSW's Business School notes that internationally, tax administrators now view outstanding, undisputed tax debt as a form of non-compliance. It begs the question: do some taxpayers plan from the start to walk away from their tax debts?
The size of Australia's aged, unpaid, undisputed tax debt has prompted the CA ANZ Tax Team to (again) raise with ATO and Treasury officials whether our tax collection system – particularly pay as you go (PAYG) instalments – need urgent reform. Another idea involves modifying the taxable payments reporting system (TPRS) so that it also becomes a domestic withholding system with a modest rate.
Even the most business-friendly government has to draw the line somewhere on unpaid income tax debts. And there's also an important issue of fairness at stake, with employees having their PAYG tax withheld at source.