The Australian Taxation Office (ATO) notified thousands of taxpayers and their agents late last year that they owed historical tax debts. Unfortunately, many individuals were unaware that the tax debt even existed.

A taxpayer rarely has a tax debt discharged by the ATO (e.g. when making payment would impose an extreme financial burden on the taxpayer). Occasionally, the ATO will opt not to prosecute a debt due to the fact that doing so would be uneconomical. 

Amounts that are placed “on hold” do not disappear; instead, they remain on the taxpayer’s account and may be reinstated at a later date. For instance, these debts are frequently deducted from refunds to which the taxpayer may be entitled. Nonetheless, the ATO ceased offsetting debts during COVID, and these amounts were not deducted. 

Irrespective of the debt’s date of occurance, the Australian National Audit Office informed the ATO in 2023 that excluding debt from offset status was not consistent with the law. In the four years leading up to 30 June 2023, the ATO’s collectable debt had risen by 89% at this point.

In response, the ATO contacted thousands of taxpayers and their agents to inform them that historical debts were “on hold” and that any future refunds would be deducted in full. 

Frequently spanning several years, with some predating 2017, the magnitude of these historical debts varied from a few cents to thousands of dollars. ATO notifications served as the initial indication of the debt for a significant number of individuals, given that delinquent debts are not reflected in account balances due to their “inactive” status. In other words, taxpayers were unaware of the debt they were accumulating because the obligations were designated as “inactive.”

The ATO issued the following statement in recent times: “The ATO has suspended all activities concerning debts that were placed on hold prior to 2017 while we assess the situation and formulate a practical and rational course of action that considers community concerns. We never intended to provoke concern or frustration. The citizens’ confidence in our tax system and records is vital to us.”

It is vital for taxpayers who have a debt on hold to bear in mind that the absence of active recovery efforts by the ATO does not necessarily indicate that the debt has been discharged.

A small company’s tax liability explodes

Small businesses are responsible for two-thirds of the $50 billion in collectable debt owed to the ATO. The ATO resumed credit collection operations as “business as usual” in July 2023. The debts of entities exceeding $100,000 in debt and failing to establish debt repayment terms with the ATO will be made known to credit reporting agencies.

Establishing communication with the ATO regarding any outstanding tax obligations of your business is imperative. Hoping the issue simply disappears will only make matters worse.

If you have any questions, please contact Bates Cosgrave.