Statistics from December 2023 showed that the ATO’s collectable debt from taxpayers amounted to approximately $50 billion. A sizeable increase from the $7 billion in June 2022. Notably, small businesses accounted for approximately two-thirds of the total $50 billion debt.
Given the significant amount of debt that has accrued over the past few years, it is worth reviewing the ATO’s approach and what tools are available to the ATO in collecting debts.
The ATO’s Approach
The ATO’s approach to tax debt can be summarised as follows:
- Prevention: In the form of the ATO sending reminders and employing engagement programs to stop debt accumulating.
- Early intervention: i.e. the ATO offers self-service payment plans as a tool to allow taxpayers to actively manage their debts.
- Firmer action: Whereby the ATO sends statements of accounts, awareness letters and other forms of communication to encourage and prompt action by the taxpayer (for example, the dreaded red headed letter).
- Stronger action: Finally, in cases of non-engagement by taxpayers, the ATO may resort to stronger legal measures, such as director penalty notices (DPNs), garnishee notices and legal action
General Interest Charges ‘GIC’
GIC is the primary deterrent to taxpayers in accumulating debt with the ATO. GIC accrues each day the debt remains unpaid and is automatically added to debt on a taxpayer’s ATO accounts. The annual GIC rate for the December 2024 quarter is 11.38%.
Importantly, draft legislation has been introduced to deny tax deductions for general interest (and shortfall interest) charges from 1 July 2025. The draft legislation has had a consultation period which ended on 16 October 2024. If enacted, the denial of deductions would effectively operate as an additional 15% to 45% increase in GIC depending on the entity of the taxpayer.
Requests of remissions for GIC are available to tax agents and taxpayers through the tax agent portal and via ATO phone services. However, in our experience, the ATO has taken a much stricter line in allowing the remission of GIC.
The ATO’s Means of Debt Collection
Other means available to the ATO to collect outstanding tax debts include:
- Offsetting Credits & Refunds: If a taxpayer has outstanding tax debts and is due a refund from a lodgement, the ATO can offset the refund against the debts.
- Engagement with external debt collection agencies: In the circumstances where a taxpayer has an overdue debt and does not respond to the ATO’s request to pay, the ATO may refer the taxpayer to an external debt collection agency.
- Issuing of garnishee notices: The ATO may issue a garnishee notice to a person or business that holds money for the taxpayer (i.e. employers, banks, debtors etc). Effectively the garnishee notice requires these entities to pay money directly to the ATO as a repayment of tax debt rather than to the taxpayer.
- Issuing of director penalty notices ‘DPN’s’: Where the taxpayer is a company, the ATO may issue a director penalty notice to one or all Directors. The DPN pierces the corporate veil and makes the director personally liable for any outstanding debts. DPN’s are primarily issued where the debts arise from PAYGW, GST & Superannuation.
Further Legal action
Where the above means of debt collection fail, the ATO can resort to legal action including:
- Claims or summons being issued to the relevant courts in the taxpayer’s state or territory.
- Bankruptcy notices can be issued demanding payment of debt or entrance into a payment with the ATO. Failure to comply with the bankruptcy notice may result in the ATO issuing a creditor petition to officially declare the taxpayer as bankrupt. A bankruptcy trustee will then take possession and liquidate a taxpayer’s assets to repay the outstanding debts.
- For companies, statutory demands can be issued to demand payment of debts or entrance into a payment plan with the ATO. Failure to comply with the demand may result insolvency, liquidation and wind-up actions against taken the company.
Conclusion
As discussed, there are a number of means available to the ATO to collect debts owed by taxpayers. These range from simple text message reminders of tax debts to severe legal actions of bankruptcy and/or liquidation. Outstanding tax debts are an issue that needs to be actively managed by taxpayers and their agents. The issue is also due to become more significant with the proposed denial of deductions for GIC from 1 July 2025.
We recommend that you engage with the ATO as early as possible to ensure that the tax debt is managed as cooperatively as possible with the ATO.
If you have any queries about the above, please contact Aidan Jenkins.