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Now the pandemic’s effects are letting up, it’s tipped that the ATO will start taking action to recover the debt. Additional resources are also likely to be allocated to the ATO to help them manage the significant task of collecting tax liabilities, especially historical ones predating COVID.

To find a reason for this tightening, you only need to look at the figures. But how much pressure will the ATO apply to claw back tax debts and who will be most affected?

If 2020 messed with any of your clients business and they have been struggling with ATO liabilities and obligations, it is important to be proactive and contact us today to discuss how we can help.

According to the ATO’s annual report 2019-20, the total debt book grew from $45 billion to $53 billion in just one year. The ATO has also openly admitted to the pandemic’s impact on a $1.3 billion shortfall against their $15 billion compliance revenue target.

These numbers are due to a combination of the tax nirvana and the increase in people claiming tax deductions during the pandemic due to homeworking and easier processes.

Double trouble: Tax debt and refund losses

During 2019-20, net tax collections dropped about 5 per cent to $404.7 billion. In addition, total tax refunds hit $132.3 billion, up 23.4 per cent from the previous year. This was 7.7 per cent less than was expected at the time of the 2019-20 budget.

The debt now owed spans all taxpayer categories. This includes collectable debt aka debt owed by individuals, businesses and super funds to the ATO. This figure currently sits at $34.1 billion, with $21.4 owed by small businesses.

It also includes insolvency debt and debt subject to appeal or objection. During 2019-20, 24,778 complaints were made to the tax ombudsman.

The ATO’s recovery approach

The ATO had previously promised it would take a softly, softly approach to recovering the debt. However, in reality, it’s likely they won’t hesitate to chase the owed amounts, even if this means liquidations and lost jobs.

This audit and recovery action includes tax debt plus JobKeeper and cash flow boost payments that were incorrectly claimed – with the latter potentially being the prime focus initially.

Our view is that the ATO will continue to be flexible throughout Q1 2021. But we can see this shifting to a tougher stance across Q2 2021.

While it seems the ATO would tackle larger companies first as they owe the most debt, many settlements with multinationals have already taken place. In addition, history tells us that small businesses and high net individuals, who make up half of the debt, will continue to be a priority.

Who’s at the greatest risk?

People and businesses who had tax debt before COVID-19 hit and with a history of poor compliance are most at risk from ATO recovery action. This includes those who have faced previous liquidations, defaulted on repayment arrangements, or made late lodgements.

The main risk will be increased audit activity followed by the serving of a statutory demand or a director penalty notice (DPN).

Under a DPN, directors are liable for any outstanding amounts, including corporate PAYG, super and GST liabilities. They are also obligated to ensure that their BAS returns are reported on their due dates.

All of this means the personal liability risk for a director of a financial vulnerable company is high.

We’ve made our predictions based on what we know right now and comparing the current situation to similar ATO trends during the GFC, but only time will tell exactly how the ATO’s post-pandemic recovery will play out.

In the meantime, if you or a client are financially struggling, now’s the time to ensure records are organised and accurate, tax obligations are fully understood, and that professional help is sought. These actions will help appease the ATO if they come knocking. Using this time now while the ATO is being generous is critical to plan appropriate strategies to turn business around rather to wait for the ATO to force the situation.