The Commissioner of Taxation has a statutory duty to pursue the recovery of tax debts. However, in certain situations, a tax debt will not be pursued. One of these situations is where the Commissioner decides that it is not economical to pursue recovery of the debt. Such a decision by the Commissioner is, or was previously, termed by the ATO as a “write-off”, though the use of such phraseology in a tax setting does not convey with it the same meaning as that which might be thought to apply in a commercial setting.
A debt written off (determined as being uneconomical to pursue) is not waived or legally extinguished. Rather, it is placed “on hold” indefinitely and can be re-raised at a later point in time.
Often, these non-pursuit decisions occur at the initiative of the ATO, where the prospect of future activity on the taxpayer’s account is unlikely or where the taxpayer is untraceable, overseas or deceased. Less often, they happen as an alternative to releasing the taxpayer from a tax liability on financial hardship grounds. This alternative might be offered where, despite obvious financial hardship occurring to the taxpayer if forced to make payment of the tax liability, a release is not possible either because the taxpayer is not an individual or the trustee of a deceased estate or because of the character of the tax liability in question (i.e. it relates to GST, PAYG withholding, super guarantee charge, director penalty notices, or other specified tax liabilities to which a release is not available).
Whilst the debt is on hold, it is inactive. It is not included in the taxpayer’s total account balance, and general interest charges (a daily compounding penalty interest charge worked out under the Taxation Administration Act 1953 and applied to unpaid tax liabilities) (GIC) are not added to the account. However, GIC can be retrospectively added to the account following the re-raise of the tax debt, effective from the date of write-off. Depending on the amount of the tax debt and the time that has elapsed between write-off and re-raise, the GIC could be substantial and could well exceed the primary tax debt previously written off. The Commissioner does have the discretion to remit GIC, generally where it is fair and reasonable to do so, though such discretion will only be exercised on a case-by-case basis.
The resurrection of such historical tax debts may come as a surprise to taxpayers who either did not know they existed or who (whether rightly or wrongly) understood the act of the debt being written off to mean that they were forever gone. This is exacerbated by their potential liability for GIC (though the debt awareness campaign embarked upon by the ATO late last year involved the ATO writing to taxpayers to advise them they have a debt on hold and that while they were not taking any action to recover the debt, any future credit or refund may be offset against it). Such an experience was publicly reported earlier this year in the context of the ATO intensifying its efforts to collect old tax debts.
An automatic trigger for re-raising a tax debt is where the taxpayer becomes entitled to a credit or refund. In that situation, the debt is re-raised, at least partially to the extent of the amount of the credit/refund, so that the credit/refund can be offset against the debt owed. The ATO is obliged to use those amounts to reduce the debt owed (except in limited circumstances). Following budget announcements in respect of the 2024-25 year, it is anticipated that the law will be changed to give the ATO discretion not to offset refunds against tax debts of individuals, small businesses and not-for-profit entities placed on hold prior to 1 January 2017 and which remain on hold. The ATO has currently paused the offsetting of such debts.
In the past, a criterion of the ATO for re-raising a tax debt was if the taxpayer submitted a tax return, which resulted in a credit of $500 or more. The appropriateness of that, particularly in the absence of additional criteria, for the purpose of determining whether it was economical, effective, efficient and ethical to re-raise a tax debt was the subject of some commentary by the Commonwealth Ombudsman back in 2009, following which the ATO agreed that additional criteria should be implemented including consideration of the taxable income of the taxpayer.
Re-raising a tax debt that goes back more than 5 (or 7) years can be problematic for a taxpayer who may not have necessarily retained the business records relevant to the existence of it. The law generally only requires such records to be retained for 5 years from when you prepared or obtained them or from when the transactions or acts those records relate to were completed, whichever is the later. Unlike ordinary commercial debts, which are subject to limiting periods as set out in legislation particular to each State or Territory in Australia (which operate to bar the bringing of claims that are out of time), such limiting periods do not apply to tax debts.
For taxpayers whose debts are re-raised for one reason or another, and particularly where the result of that is the application of substantial GIC to their account, it may be appropriate for them to obtain legal professional advice promptly as to any potential options moving forward. Some considerations are whether a release from liability is possible and feasible or whether there might be good grounds to argue remission of the GIC is fair and reasonable based on the facts and circumstances peculiar to the taxpayer.
Whilst not directly related to the re-raising of historical tax debts, but nevertheless important to raise in this context, is the potential timing issues associated with attempts by the Commissioner to recover alleged director penalty liabilities against directors (or former directors) of companies where the company alleged to have owed the primary tax liability has long since been wound up and the associated business records destroyed by the liquidator appointed to it. Whilst not subject to the usual limiting periods applicable to ordinary commercial debts as mentioned above, the potential prejudice occasioned to the taxpayer as a consequence of the delay (including the potential loss of important business records relevant to the taxpayer’s ability to sufficiently respond to the claim) will be important considerations.
DW Fox Tucker Lawyers are experts in taxation law and can assist you with your tax-related queries.
