When is an ATO debt really written off?

“A debt that is uneconomical to pursue can always be pursued at a later date depending on the circumstances” Assistant Commissioner Michael Zeitlhofer is quoted as saying. And, it is this sentiment that has come back to bite for many Australians with Australian Taxation Office (ATO) debts that they believed had been written off.

It is the underlying policy of the ATO that the only way to have a tax debt cleared is to pay it, it becomes not recoverable at law, or if you obtain a formal release (in whole or in part) of the debt by following a specific debt waiver application that is approved by the ATO or by the Finance Minister.

Many are surprised to know that the statute of limitations does not apply to Commonwealth liabilities (the statute of limitations is a State based act of law). The Commissioner’s powers and obligations are governed by the Public Governance, Performance and Accountability Act 2013 (Cth). This Act imposes a positive duty on the Commissioner to pursue each debt they are responsible for. The Commissioner does not have any power to “write-off” taxation liabilities in a commercial sense. But on the other hand, the Commissioner has no obligation to pursue recovery of a debt at all costs. If they are satisfied it is not legally recoverable, they can stop the pursuit. Common examples are the bankruptcy of a debtor. Or when a company is wound up in insolvency. The Commissioner may deem that a liability is uneconomic to pursue and cease active recovery action. However, that liability remains on the Commissioner’s books. So, any future credits to which a taxpayer may become entitled may be applied in reduction of it.

The confusion arises as the Commissioner has a practice of not pursuing tax debts they consider are not economic to recover - a term they refer to as a “debt write-off”. Such a decision, however, is not a formal release of a debt. The debt may disappear from all ATO accounts and the debt is no longer chased. However, the debt still sits in the ATO system waiting to be reinstated.

The Commonwealth Ombudsman issued a report on ATO debt collection practices in March 2009 stating:

“The term ‘write-off’ is confusing for taxpayers. Unlike the commercial meaning of the term, it only reflects a decision not to pursue the debt for a period of time and can be reversed if and when the ATO considers that the person’s circumstances have changed. The main trigger for the ATO deciding that a person’s circumstances have changed is if the taxpayer submits a tax return which results in a credit of $500 or more.”

In the year ended 30 June 2008, the ATO re-raised 7,070 income tax debts totaling almost $105 million. While most of these debts had been written-off in the same year, others had been written-off as far back as 1986. In the year ended 30 June 2007, the ATO re-raised written-off debts incurred as far back as 1982.

The Commonwealth Ombudsman has received complaints in relation to re-raised tax debts. In these cases, complainants said that they were not aware that a written-off debt was recorded against them and could be re-raised. In some cases, taxpayers were asked to pay general interest charge (GIC), a daily compounding penalty interest rate, applied back to the write-off date. In others,

the GIC amount was remitted automatically. In one complaint investigated, debts dating back over 25 years and written-off over 12 years earlier had been re-raised and charged interest for the write-off period.

So, the message is fairly clear – just because the ATO stops chasing or the debt no longer appears on your account does not mean the debt will not reappear when circumstances change. It is possible to have debts released on the grounds of serious (financial) hardship and, at PKF, we have had success in having a formal release applied in many cases so that the debts cannot be re-raised when things turn around.

If you have any concerns regarding tax debts and what is required for a formal release, please contact us.