Businesses can start to expect a more unforgiving Australian Tax Office (ATO) when it comes to collecting outstanding debts or historic penalties, which currently total more than $50 billion.
While the ATO had adopted a more lenient approach to debt collections during and immediately following the Covid-19 pandemic, which helped many businesses stay afloat, it is now adopting a more stringent approach.
Historically, Australians have been very good at paying tax on time, whether by design – because tax is withheld from wages – or through the nation’s positive payment culture where paying tax is seen as the right thing to do.
As a result, the ATO usually doesn’t have to enforce debt collection as much as tax offices in other countries. But the ATO is now sending a clear message that businesses can’t continue to ignore their tax debts.
At the end of 2023, the ATO reported that it had more than $52.4 billion worth of debt on its books, out of which small businesses made up 65 per cent of the amount owed. Most of this debt is self-reported Business Activity Statement (BAS) debt such as GST and PAYG Withholding on salaries and tax on profits.
There is no room for complacency when it comes to having the ATO as a creditor. It has broad statutory powers, with debt recovery measures that can include reporting small businesses to credit reporting agencies (which can adversely affect their credit status), shorter deadlines for payments, issuing garnishee notices against directors’ funds or director penalty notices, and in rare cases initiating wind-up applications.
Ultimately managing tax obligations is proof of solvency and the ATO’s crackdown on enforcement should serve as a reminder for businesses of the importance of cashflow, ensuring proper account management and having their own robust debt recovery process. This is critical in the current economic conditions where many businesses are facing pressure on margins, employee costs and expectations given higher interest rates and still high inflation.
The ATO’s approach can also apply to individuals. The ATO has sophisticated systems, including those driven by artificial intelligence, which will flag aggressive claims for deductions such as travel, rental properties or motor vehicle costs.
For late payers, the ATO will automatically add a general interest charge to what is owed. This means the debt will grow each day it remains unpaid. Interest calculates on a daily compounding basis and is added to the account periodically. That means that the sooner you pay any outstanding debts, the better off you will be.
This article was first published in the Summer 2024-25 issue of Financial Times.