The Australian Tax Office (ATO) is undergoing significant shifts in its approach to debt collection, with implications that directly impact small—to medium-sized businesses (SMBs). Understanding these trends is vital for SMBs to manage their tax obligations effectively and mitigate potential risks.
Debts on Hold Program:
In response to community feedback, the Australian Taxation Office (ATO) has paused its awareness campaign about tax debts on hold. The ATO acknowledged the community’s concerns and decided to review its overall approach to communicating about debts on hold.
The purpose of the awareness campaign was to provide individuals with complete visibility of their debts with the ATO, where the collection had been put on hold. These debts primarily relate to tax returns for past income years. The letters sent as part of the campaign were reminders about existing debts but did not require immediate payment. However, the ATO recognised that its communication approach may have caused unnecessary distress, particularly regarding debts incurred several years ago.
The ATO will review its overall approach to debts on hold before proceeding with any further communication efforts. The ATO wants to ensure taxpayers trust the tax system and its records. While individuals who have received a letter need not take further action, those with questions about their existing tax debt can contact the ATO for additional information.
Deductibility of Settlement Payments:
Following the Federal Court’s decision in Commissioner of Taxation v Wood [2023] FCA 574, SMBs must heed the ATO’s stance on the deductibility of settlement payments. The court’s ruling permits taxpayers to claim deductions for settlement payments made post-employment cessation, provided they relate to litigation risks arising from the taxpayer’s prior role. This underscores the importance of understanding the tax implications of settlement agreements, especially regarding employment-related disputes.
ATO Debt Collection Actions:
The ATO’s recent announcement signals a shift towards firmer debt collection actions, targeting profitable businesses with overdue tax debts. SMBs must recognise the ATO’s commitment to enforcing tax compliance and prioritise timely payment or engagement to avoid penalties and interest charges. With SMBs contributing significantly to collectable debts, proactive debt management is essential to mitigate financial risks.
ATO’s Corporate Plan:
The ATO’s Corporate Plan for 2023-2027 aims to enhance small business tax performance, multinational tax performance, and superannuation guarantee integrity. This underscores the ATO’s proactive stance in addressing tax compliance issues across various sectors.
Debt Recovery Strategy:
As outlined in its Corporate Plan, the ATO’s aggressive approach to taxpayer refunds underscores its intensified debt recovery strategy. The ATO is becoming less inclined to entertain lengthy payment arrangements, signalling a stricter stance towards debt recovery.
Increased Enforcement Actions:
With an expanded workforce in its debt collection department, the ATO is poised to ramp up enforcement actions to pre-COVID levels. SMBs with tax debts exceeding $100,000 receive warning notices, and there has been a notable increase in Director Penalty Notices (DPNs).
SMBs need to stay informed about the evolving trends in ATO collections and adopt proactive strategies to manage their tax obligations effectively. By leveraging available resources, complying with tax laws, and engaging with the ATO on time, SMBs can navigate these challenges and safeguard their financial stability in an increasingly complex regulatory environment.
At RRI, we are here to help you make sense of these latest ATO trends and what it might mean for your clients or your business. Email us for a confidential discussion today.
Disclaimer
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to RRI Advisory’s clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.