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Disputed Debts with the ATO – teamwork makes the dream work?

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On 9 November 2023, the Australian Taxation Office (ATO) updated Law Administration Practice Statement PS LA 2011/4 (PS LA 2011/4). PS LA 2011/4 contains the Commissioner’s guidelines for managing the collection and recovery of disputed debts.

The update comes as no surprise as the ATO has repeatedly spotlighted addressing collectable debt and a shift to exercising firmer debt collection actions (see for example, the Commissioner’s address to the Tax Summit 2023; and the ATO’s 2022-23 annual report). The ATO reported $50.2 billion in collectable debt as of 30 June 2023.

Compared to the previous update to PS LA 2011/4 in 2015, the language used in this update suggests the ATO is keen to adopt a more cooperative and pliable approach to collecting disputed debts. Paragraphs previously dedicated to highlighting the Commissioner’s power to initiate recovery action were redirected to the Commissioner recognising the taxpayer’s individual circumstances and rights to dispute their liabilities. The ATO’s expectations from taxpayers in relation to disputed debts became recommendations for taxpayers on how to proceed. Notably, the ATO removed all mentions of the earlier position that tax debts should be paid, even if disputed, in this update.  

Helpfully, while the previous version merely references PS LA 2011/6 for the ATO’s risk assessment process, the rewrite sets out both the general risk assessment factors from PS LA 2011/6 and specific factors that the ATO considers in the context of disputed debts. These factors are set out in paragraphs 14 to 16 and include, among others:

  • the subject matter of the dispute;

  • whether a minimum of 50% of the debt has been paid;

  • any significant changes in the taxpayer’s financial position (to suggest dissipation or alienation of assets);

  • the taxpayer’s compliance history, financial capacity, and willingness to cooperate with the ATO;

  • the size and age of the disputed debt;

  • the merits, timeliness, and reasonableness of the taxpayer’s case; and

  • whether there is evidence of the taxpayer being involved in fraudulent activities such as phoenixing.

The update emphasises that if the taxpayer’s tax affairs are straightforward and the risk to the revenue is low, then the ATO will not seek to recover a disputed debt while an objection, review, or appeal is ongoing. However, if the risk is high or the ATO needs to secure payment before resolution of the dispute, then the ATO will aim to work with the taxpayer to explore other options as an alternative to commencing recovery action. Examples of the alternative options include instalment payments of the disputed debt and provision of security until the dispute is finalised.

Beyond the changes, it is also noteworthy to highlight that the 50/50 arrangement survived the update’s rewrite. This means the ATO will continue to encourage taxpayers to pay a minimum of 50% of the disputed principal tax debt in return for the Commissioner deferring recovery of the balance and partially remitting the interest (“GIC”) that would otherwise be payable.

Overall, the update highlights the ATO’s prioritisation of the recovery of high-risk, high-value, and fraud-related debts. This is consistent with the focus area “Implement targeted strategies to address collectable debt” that the ATO explains in its 2022-23 annual report. At the heart of the focus area, the ATO encourages taxpayers to engage with the ATO. To achieve this end, taxpayers who engage were offered options such as payment plans, additional time, and remission of penalties and interest (where appropriate). Taxpayers who chose to not engage with the ATO were subject to firmer and stronger action. We consider it likely that this approach will continue for the 2023-24 year.

Sladen Legal’s federal taxes and dispute resolution teams have extensive experience acting for private enterprises in reviews, audits, and disputes with the ATO. If you would like assistance with your affairs, please contact the following:

Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 |  T +61 3 9611 0105
E dsmedley@sladen.com.au

Alicia Hill
Principal | Accredited Specialist in Commercial Litigation
T +61 3 9611 0180 | M +61 484 313 865
E ahill@sladen.com.au

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au

Edward Hennebry
Senior Associate
T +61 3 9611 0113 | M +61 405 847 261
E ehennebry@sladen.com.au

James Gao
Lawyer
T +61 3 9611 0166
E jgao@sladen.com.au

James Gao