ATO to adopt 'more explicit and consistent' approach on tax debt interest

The Tax Office has estimated that around half of this amount is collectible, with small businesses owing around $35 to $40 billion in collectible tax debt alone.

Hirschhorn said that to reduce its current debt book, the ATO is focusing on how its settings interact with the financial services sector.

He noted that while the ATO needs to have concessional tax settings for taxpayers in vulnerable positions, including those impacted by the recent fuel price increase, in practice, the ATO has been too lenient in some situations.

"We have realised that our stance in practice, particularly in relation to interest remission, has been more concessional than our intended stance, and even our intended stance may have been overly concessional for many taxpayers not in vulnerable positions," he said.

"This has meant that some businesses which should be seeking financing for their working capital from the financial services industry, are instead running what is effectively an ATO working capital overdraft, often on the hope or expectation that the overdraft is in practice interest free."

The ATO recently agreed to make changes to its approach to the remission of the general interest charge (GIC), following the release of the Tax Ombudsman's review into GIC.

One of the main concerns raised in the review was inconsistency across ATO decisions regarding GIC remission.

Over the next period, Hirschhorn said the ATO was looking to be "more explicit and consistent" in its stance on charging interest, which is now non-deductible, with the hope that businesses obtain their finance from appropriate sources in the financial services industry.

Hirschhorn said it was also important that financial services companies dispel the myth that they do not provide finance businesses with tax debts.

The Tax Office is hopeful this approach will lead to better management of debts on an ongoing basis and also resolve some of its current debt book, he said.

Hirschhorn also said that timing lags had been a significant contributor to the current tax debts owed by small businesses. 

"There is often a lag between when the underlying tax event occurs, when a business is paid by its customer, and when the tax associated with that transaction is due to be remitted."

"The longer that lag, the greater the opportunity for error, for cash flow pressure to build and ultimately for debt to accumulate."

This lag materially increases both the likelihood and the scale of non-payment, according to Hirschhorn.

"It's one of the reasons why we are so focused on system design that brings reporting and payment closer to the economic event itself, so that this debt book does not continue to grow," he said.

Payday super, he said, was a good example of obligations moving closer to economic events under an OECD Tax Administration 3.0 model.

"Under Payday Super, superannuation funds will be required to report to us key data sets when an employee’s super is paid in close to real time," he said.

"That data will then be matched against what employers are reporting through payroll systems at the same time."

Hirschhorn said the ATO's ability to digest this data at scale is foundational to system's integrity.