During the COVID-19 pandemic, the Australian Tax Office (ATO) took a step back from debt collecting. This was partly due to staff being redeployed to stimulus measures such as JobKeeper and the cashflow boost, allowing businesses to manage cashflows during uncertain times.

During that period, the ATO’s focus was to encourage taxpayers to keep up to date with lodgements even if they didn’t have capacity to pay offering payment plans and, in certain circumstances, remission of general interest charges and late lodgement penalties.

In the period since the height of the pandemic, the economic conditions, including rising interest rates, has seen cash-flow pressures for many taxpayers, and they have become accustomed to this relaxed approach by the ATO with respect to debt collections. This has seen the amount of debt owed to the ATO increasing from $26.5 billion in June 2019 to $50.2 billion in June 2023.

The ATO has described this increase in outstanding debt as unsustainable and noted of particular concern that small businesses are overrepresented in the taxpayers with debt outstanding. They are also concerned taxpayers are using the ATO as a bank and being passive in response to their outstanding tax debts.

Although the ATO will be targeting all outstanding debt, some of the key focus areas will include unpaid superannuation, debt arising from ATO audits, fraud and aged/ high-value debts.

The ATO has now increased the workforce in its debt collection department and is taking a more proactive approach to debt collection. This means the ATO will be more aggressively following up tax debts in a timely manner and taxpayers will be required to provide further justification in requests for payment plans and interest remission requests.

In addition, the ATO will be using other strategies to encourage taxpayers to make payment and, where there is failure to comply with the request, it will be increasingly resorting to director penalty notices (DPN), garnishee notices and, in extreme circumstances, insolvency measures.

The DPN can apply to make directors personally liable for outstanding debt relating to the GST, the Superannuation Guarantee Charge (SGC) and PAYG withholding. These amounts are viewed separately from income tax debt in that they represent money of which the ATO has collected on behalf of others, not taxpayers, and hence the DPN is a more aggressive approach.

Taxpayers need to be aware of the ATO’s tougher approach to debt collection and not automatically assume that general interest charge will be remitted, or a payment plan granted at a lower interest rate than they could have received elsewhere.

Now is the time to ensure that where possible all debts are paid on time. If that is not possible, there should be clear communication to the ATO to ensure that some of the harsher actions by the ATO debt collection do not occur.

This article was first published in the 2023-24 Summer Issue of Financial Times.