The Inspector-General of Taxation’s analysis of four years of ATO data found that collectable debt grew by its largest margin between 2019 and 2020 from $26.6 billion to $34.1 billion, after the ATO suspended debt collection activity in response to the black summer bushfires and the early impact of the COVID-19 pandemic.
However, discounting the unique circumstances in 2020, tax debts have been on an upward trajectory between 2016 and 2019, increasing at a higher rate than the four proxies for economic growth: Gross Domestic Product (GDP), Consumer Price Index (CPI), Wage Growth Index and the labour force statistics.
IGTO Karen Payne said the report, released on Wednesday, does not aim to explain why collectable debts are increasing, but instead highlights where tax debts are accruing and aims to inform future investigations.
“It is a significant measure of economic maturity to be able to understand and manage positive change in tax debt collection and management,” said Ms Payne.
“Actual collection of taxes, including the effective pursuit and recovery of tax debts, is an important moderating factor in decisions to raise or increase taxes and few governments or taxpayers would want to see taxes increased unnecessarily.”
The report found that small business taxpayers accounted for the majority of the overall debt book at 62.6 per cent, or $21.4 billion.
Individuals not in business were responsible for 20.6 per cent, privately owned and wealthy groups made up for 11.2 per cent, while public and multinational companies accounted for 3.9 per cent of overall collectable debt levels.
However, an inspection of debt amounts owed found that a small percentage of taxpayers were responsible for a significant value and percentage of outstanding collectable debts.
Just 5 per cent of all debt accounts were responsible for 63 per cent of collectable debt, averaging $176,133 per debt account.
In contrast, 53 per cent of debt accounts were responsible for just 2.7 per cent of overall collectable debt, with an average of $721 per account.
On an industry level, those in construction represented 21 per cent of the total collectable debt, with professional, scientific and technical services accounting for 13 per cent, and accommodation and food services rounding up the top three industries at 6 per cent.
The IGTO also examined the composition of general interest charge (GIC) in relation to the overall collectable debt after complaints and anecdotal evidence suggested that the debt book was rising because of the rate in which GIC accumulates and compounds.
However, it found that GIC consistently accounted between 12 and 13 per cent of total collectable debt, despite the growth in overall debt.
‘A balancing act’
CPA Australia’s senior manager of tax policy, Elinor Kasapidis, said that while the IGTO’s report was useful in understanding the trending increase in tax debts, it should not be weaponised for a debt collection offensive.
“It’s a balancing act and it is not in anyone’s interest for the ATO to run businesses and individuals into insolvency or bankruptcy just because of their tax obligations,” said Ms Kasapidis.
“What’s important is that they monitor taxpayers and ensure there are early interventions and that support is available to help taxpayers reasonably manage their debt.
“Once you start issuing garnishee notices or take aggressive action, it’s almost too late and the question is really, how can we stop these debts from rising in the first place?
“A large amount of the debt is concentrated in a small number of taxpayers, so it is really important that the ATO works with those taxpayers to recover those debts and understand the drivers of those particular accounts.”
The IGTO has now called on the ATO to enhance its reporting of its debt book and debt recovery activities, as well as to develop new metrics to measure its debt collection performance, including a return on investment against its efforts to collect debts.
Tony Greco, general manager of technical policy at the Institute of Public Accountants, believes that while the “sheer magnitude” of the collectable debt would command attention, further investigations to uncover the reasons behind the continued growth would be needed.
“To better manage this asset, greater insights and enhanced reporting are recommended by the IGTO which the IPA supports,” said Mr Greco. “This will help target investigations into problem areas and measure the effectiveness of the ATO in recovering collectable debt.
“Improving the performance of managing tax debt is particularly important as Australia repairs its finances in a post-COVID world.
“It is also important to maintain public confidence in our tax system and the perception that there is a level playing field; otherwise, it could impair our high level of voluntary compliance.”
Jotham Lian is the editor of Accountants Daily, the leading source of breaking news, analysis and insight for Australian accounting professionals.
Before joining the team in 2017, Jotham wrote for a range of national mastheads including the Sydney Morning Herald, and Channel NewsAsia.