The ANAO is currently conducting an audit of the ATO to assess the effectiveness of the ATO’s management of small business taxpayer debt.
The ANAO says it is asking:
- Are the risks relating to small business taxpayer debt appropriately managed?
- Does the ATO have a sound strategic framework to manage small business taxpayer debt?
- Does the ATO effectively use compliance strategies to manage small business taxpayer debt?
These questions are sufficiently opaque to allow the ANAO some wide scope for its audit. The ANAO says that the ATO faces a series of compliance risks including those arising from administering tax legislation, private rulings, new policies and programs, risk profiling, delivery of budget measures, combating the shadow economy , and performance measures relating to compliance activities .
There are said to be potential risks relating to the effectiveness of debt recovery and management if the ATO does not implement appropriate policies and procedures . These risks may lead to an increase in non-recoverable debts, potential reputational risk to the ATO around debt recovery and increases in tax gaps.
There are other potential risks associated with the ATO workforce, the need to maintain a consistent focus on promoting compliance with the requirements of its ethical and probity frameworks, and potential reputational risks if the ATO does not comply.
Comment
However, the ANAO interprets this, it should examine the effectiveness of each of the various processes that the ATO uses to recover tax debt. These might include early identification of debt, the use of pre-legal demands, and garnishees and penalty notices. How effective is the issue of a bankruptcy notice or a winding up demand, and then petitions, and payments at the door of the court? We can be reasonably sure that dividend payments out of liquidation, or DOCAs, or bankruptcy or Part Xs, are nil to insubstantial but the process will have removed an insolvent business from the market.
These comments are made in the context that over time – decades, the various director personal tax liability measures introduced in 1993, in support of the then new voluntary administration regime, were extended and tightened. These include the lockdown provisions for director penalty notices. However none appear to have been the subject of any effectiveness assessment in terms of debt recovery. The ATO would have sought these tighter measures from government but to what effect, if any, we don’t know, nor whether the ANAO is itself constrained by any lack of assessment data.
A larger issue arises from the nature of the ANAO’s questions – based on the assumption that a debt has already arisen and must then be recovered. Pre-emptive powers, general deterrence and other legislative and process approaches of the ATO might also be assessed.
The ANAO will have in mind the broader economic perspective that, as the ATO has said, non- or delayed payment of tax puts compliant taxpayers at a competitive disadvantage, even such as to compromise their own compliance. And as DEWR has said, phoenix activity also has this negative market impact. The ATO’s recovery of tax therefore has a focus on the maintenance of fair competition.
In that respect, debt recovery of, say, only 20c/$ from an unreliable taxpayer needs to be balanced against the ATO’s public interest responsibility to the market. The ANAO might note recommendation 21 [10.105] of the PJC Report to examine the “overall economic and social benefits and costs of Australian Taxation Office relief to potentially insolvent companies in hard economic times, in the context of the impacts on the purposes of the insolvency system”; and recommendation 22 [10.106] that the ATO “consult, act on and publish model creditor guidelines, consistent with its model litigant obligations”.
Finally, the ANAO might keep in mind the recent Capability Review of the ATO and its foreshadowing of a future where ‘tax just happens’. A future where “tax just happens” – Murrays Legal
Contributions to the ANAO audit
Public contributions to the audit are open until 28 September 2025, with the ANAO due to report by February 2026.
