Debt recovery actions against small businesses with disputed debts are rare and only occur under “exceptional circumstances”, the Australian Tax Office has said in a statement in response to a report criticising it for the practice.
The practice of issuing garnishee notices on small businesses with cases before the Administrative Appeals Tribunal was slammed yesterday by Small Business Ombudsman Kate Carnell, who said such actions by the ATO “can have a crippling impact on businesses”.
“This is especially true when the first knowledge of a garnishee notice is the bank not honouring payments such as wages, rent, suppliers’ invoices or even loans,” Carnell’s report argues.
“This has a devastating impact on a small business, and the follow-on effects of such actions on the ability to pay, reputation and credibility is significant.”
But a statement issued by Tax Commissioner Chris Jordan later that day argued the practice was very rare, and only occurred in “exceptional circumstances” such as “where there are links to organised crime, phoenixing, evasion or other fraudulent activity, or where we have evidence of the taxpayer dissipating assets or transferring funds to frustrate collection of tax”.
Of the 108 small business cases finalised in the AAT in 2017-18, there were only 17 cases identified where some type of debt recovery activity occurred, says Jordan.
The ATO took garnishee action in just four cases, in which tax owed amounted to $5 million — including one taxpayer who owed almost $2.5 million. It pursued debt in other ways, for example a letter or a call, in a further 13 cases.
“We are talking about low numbers here. There are 3.8 million small businesses in Australia, and I want to ensure that these figures are not extrapolated or manipulated. These are cases that went to the AAT, and as such have unique characteristics, that do not reflect the broader small business population.”
Jordan noted that small businesses collectively owe $15 billion in tax debt — almost two-thirds of all debts owed — arguing it is the ATO’s job to ensure GST and tax withheld from employees’ pay is passed on “as this was never the small business’s money”.
The four cases where garnishee action was taken “were highly unusual”, he said.
“One of the matters involved a tax agent with a chequered history of fraud and evasion, on top of non-compliance, overdue lodgments and undisputed debt of over $100,000. The tax agent was believed to have gambled away over $300,000, refused to return our calls and letters, and failed to provide evidence. It is clear given these circumstances why garnishee action was appropriate.
“Another one of these cases was referred to the ATO by Australian Customs and Border Protections Services and involved evidence of engagement in criminal activity by the taxpayer. During the appeal process, the taxpayer started hiding assets which led us to issue a garnishee.”
Managing tax debts and disputes are “complex endeavours, and we are always looking to improve”, he added.
“This is why in 2018 I asked the ANAO to come and review the way we manage tax debts for small businesses. I look forward to the ANAO’s report, and to our continued work in this space.”