A Capability Review of the Australian Taxation Office has been conducted which foreshadows a future where tax obligations are paid automatically in a way that is integrated into the systems that taxpayers already use to transact and manage their affairs – where ‘tax just happens’. Apart from the significant improvement in timely tax payments, such a belated approach would have a positive impact on insolvency numbers and the insolvency system itself.
That is, the insolvency system is significantly supported by the limitations of enforcement of tax payments.
This the 8th ATO Capability Review is required by s 44A of the Public Service Act 1999. Capability reviews are an independent and forward-looking activity assessing an agency’s ability to meet its future objectives and challenges. The aim is to facilitate discussions around the agency’s desired future state, highlight organisational capability gaps and identify opportunities to address them.
Tax owed by 4.2 million small businesses being the bulk of the $52.8 billion collectable tax debt.
As the review states, one of the ATO’s key focus areas is to strengthen its debt collection. That presupposes that debts have arisen to collect; they have, owed by 4.2 million small businesses, which holds the bulk of the $52.8 billion collectable tax debt. Much of this debt relates to taxes withheld or collected by businesses and unlawfully not remitted to the ATO.
That will change.
Consistent with overseas trends, the ATO envisions a future where tax obligations are paid automatically in a way that is integrated into the systems that people and businesses already use in order to transact and manage their affairs. The review says that achieving this will require taxpayer support, amended legislation, transformations to information technology (IT) systems and infrastructure as well as changes to the relationships the ATO has with taxpayers, tax agents and software providers.
The ATO is looking to leverage the digitalisation of the Australian economy to move to a system where, the review says, ‘tax just happens’ – in other words, where tax is collected using the systems that people and businesses already use to transact and manage their affairs. This integration would reduce the compliance burden on taxpayers and reduce the risk of new debts accumulating. At the same time, the review acknowledges that the digitalisation of the economy presents new risks to tax and superannuation administration.
The ATO has already integrated tax reporting into third party software through its Single Touch Payroll.
The review says it is
“easy to imagine a future where obligations such as GST and pay as you go (PAYG) withholding are paid to the tax office at the point of transaction, rather than through a separate lodgement”.
To realise this vision, the ATO will need to continue to work closely with software providers who are now “critical tax intermediaries in the same way as tax agents”. It will also need to work with the rest of government to develop these reforms.
Such a transformation would have a significant impact on insolvency numbers, removing from the market those insolvent businesses continually reliant upon unremitted tax payments, and then confining numbers to “real” insolvencies.
In 2016, an opportunity to address this was, like most significant tax reform in Australia, rejected. The misuse by directors of tax moneys withheld from employee wages by way of delayed remittance to the ATO in order to provide a cash flow buffer has been severely criticised and penalised by the courts for years – they are “trust moneys which do not belong to the company” which if not paid show “a serious lack of commercial morality”: Cullen v CAC 1988, or rather illegality.
On the law side, the recovery options were limited, applying only after the event. It was up against the accounting side, with the practice of real time tax moneys continuing to be used for cash flow for under-capitalised companies.
“longest lag times between employees being paid and taxes being remitted”
It was reported in 2016 that Australia
“[stood] out internationally as having some of the longest lag times between employees being paid and taxes being remitted to the Government” and that “this may be a contributing factor to the significant collectable debt owed by businesses”.
Single touch payroll was intended as requiring businesses to not only report but also to pay, real-time, on a quarterly basis. That would have imposed some financial rigour by way of weaning businesses off the use of money that was not the company’s – money that often also concealed the insolvency of the business.
Despite that, and the impact on collectable tax debt, the then government backed down, announcing on 10 June 2015 that it recognised the “cash-flow implications for business of real time payments”, and that it would only require voluntary payments. In other words, those implications were that businesses could continue to not pay, perhaps at all, employee tax moneys withheld, to support their cash flow.
Payment timeframes weren’t changed. Meanwhile, in 2025, the ATO’s unpaid debt remains and the ATO is busy winding up to little effect and many insolvent businesses are still continuing to trade.
One Response
The vision of a “tax just happens” system reflects the increasing role of technology in compliance. While this could reduce debt accumulation, businesses will need to carefully plan for the transition. Clear Tax (https://cleartax.com.au/) works with clients to prepare for such changes and maintain strong financial practices.