ATO audit recommends SME debt collection targets

McLiesh’s report found the ATO’s grip on small business debt has been “partly effective” after it increased by nearly 118 per cent over eight years ending in 2024–25.

While the ATO’s corporate plan for the 2025–26 financial year prioritised strengthening payment performance and debt collection, ANAO found that it “does not use its performance measures to routinely benchmark, monitor and report performance of its debt recovery interactions or changes over time”.

Previously, in its Practice Statement Law Administration PS LA 2011/6, the ATO said: “We are not resourced to chase every last dollar of revenue payable under the law. This means that we are required to make intelligent choices about what compliance risks will be addressed, how such risks will be addressed and where to best apply available resources.”

“Internal targets to reduce debt volumes for small business are absent. The whole of the collectable debt performance measure does not identify small business debt performance,” the report found.

McLiesh revealed that resource prioritisation by the ATO results in a small proportion of all taxpayer groups being identified for firmer, stronger actions directed at staff to progress, noting the limits thus placed on the Tax Office’s effectiveness, which is exacerbated by a lack of debt-collection efficiency measures.

“The ATO has extensive internal data stores, data reports and visualisations which are not being fully utilised to analyse debt taxpayer interactions and measure payment behaviour, response rates, debt outcomes, and changes in lodgment and payment compliance,” the ANAO said.

Based on the ATO’s 2024–25 financial statements, there is a risk that it will not collect over half of the total $98.4 billion) total tax owing ($49.8 billion). It identified small businesses as the largest driver of overall tax debt, with 1,338,387 owing an average of $26,797 in collectable debt in 2024–25.

Further, it noted that 66.1 per cent of total collectable debt in 2024–25 belonged to small businesses. The ATO speculated that its leniency during the pandemic may have led to poor tax performance among some businesses.

“Small business collectable tax debt increased by $19.4 billion between 2018–19 to 2024–25. The ATO reduced debt collection measures to assist taxpayers in response to natural disasters, the COVID-19 pandemic and economic shocks.”

Currently, the ATO uses a range of debt collection activities using early engagement actions such as SMSs, blue letters and reminders, through to firmer actions (firmer action warning letter (FAWL), garnishee, director penalty notices (DPNs) and disclosure of business tax debt) and stronger actions (for example, s459E, wind-ups and insolvencies) to recover debt from small businesses.

“Preventing debt remains a priority supporting efficient administration by reducing the need for recovery action, particularly where aged debts present lower recovery prospects and are subject to compounding GIC,” David Allen, second commissioner to the ATO, said in his response to the report.

“The ATO will carefully consider the ANAO’s recommendations throughout implementation as part of our commitment to continuous improvement and effective stewardship of the tax system,” Allen said.