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Tuesday, 18 June 1996
Page: 1747

(Question No. 46)


Senator Ian Macdonald asked the Minister representing the Treasurer, upon notice, on 7 May 1996:

(1) With reference to each of the financial years 1985 to 1994 inclusive: (a) in how many bankruptcies has the Australian Taxation Office (ATO) been: (i) the petitioning creditor, and (ii) a supporting creditor; and (b) how many of the taxation assessments resulting in bankruptcies in each year were handled by the ATO (Australia-wide).

(2) Does the Taxation Commissioner have any guidelines issued to his officers with respect to the settlement of taxation debts; if so, what are those guidelines; if not, why not.

(3) What are the Taxation Commissioner's guidelines with respect to the settlement of taxation debts on a commercial basis.

(4) Does the Taxation Commissioner take into account the interests of other creditors when: (a) taking bankruptcy proceedings; and (b) determining whether to accept an offer made by a taxpayer.

(5) Is it the policy of the ATO to push taxpayers into bankruptcy in order to close the particular file; if not, what is the purpose of forcing taxpayers into bankruptcy.

(6) Is it the policy of the Taxation Commissioner to assess a particular taxpayer's position in the situation of an unpaid taxation debt with a view to maximising the benefit to revenue; if so, why does the ATO refuse so many proposals for settlement.


Senator Short —The answer to the honourable senator's question is as follows:

(1)(a) & (b) It is not possible to provide the specific information requested by the honourable senator, as that information is not kept by the ATO. Legal action to recover a debt, which may ultimately result in the sequestration of an individual debtor's estate in bankruptcy or the liquidation of a corporate debtor, is commenced in quite a number of cases. However, that action may not always be pursued to its ultimate conclusion because the debtor may pay in full or may enter into an acceptable arrangement to pay a debt over time.

In some cases, debtors present their own petition for bankruptcy. There are also cases where other creditors of the ATO debtor may initiate legal recovery action and pursue a debt to bankruptcy or liquidation (the ATO will figure as a creditor in a majority of bankruptcy/liquidation cases given the nature of taxation and its application to the majority of Australians). In those cases, the ATO will either lodge a proof of debt with the official receiver, a trustee in bankruptcy or a liquidator or will ask the Court to be substituted as the petitioning creditor in appropriate instances.

The Commissioner has provided the following information for each of the years ended 30 June 1992, 1993, 1994 and 1995 in relation to cases finalised as a result of legal action and cases on hand and subject to some form of insolvency action (that is, corporate liquidation or individual bankruptcy). Information prior to these years is not available.

(1)(a)(i) The following table shows number of cases finalised as a result of legal action for the years 1992 to 1995:

Year ended 30 JuneNumber% of totalValue—$m% of total
19923,2771%471%
19938,0062%832%
199412,7233%1614%
199513,9663%1313%

(1)(a)(ii) The following table shows number of cases on hand and subject to some form of insolvency action for the years 1992 to 1995

Year ended 30 JuneNumber% of totalValue—$m% of total
199215,8195%77116%
199311,5344%63715%
199410,0794%57714%
19959,7744%53113%

(2) ATO officers are aware of the policy and procedural documents and the various Rulings relating to activities that impact the collection of overdue debts issued by the Commissioner (where those activities relate to collection of the total debt, including the additional charges for late payment imposed by legislation). In the main, these documents are available to the public and set out policy and guidelines for debtors and also for staff who may be considering:-

   action to estimate some outstanding debts;

   requests for time to pay outstanding tax debts by instalments;

   proposals by corporations to enter into agreements to pay;

   requests for remission of additional charges for late payment;

   writing off debts that are irrecoverable at law, irrecoverable because the debtor is without assets or uneconomical to recover;

   claims by debtors that payment of their debts will cause serious hardship; and

   instituting some form of legal recovery action, including issuing `garnishee' notices or proceeding to bankruptcy/liquidation.

(3) The Commissioner is in a vastly different position to a commercial creditor in that he cannot refuse to deal with a debtor or withhold supply. Invariably, the debtor will be required to lodge a subsequent income tax return and potentially, incur another debt, or be required to remit monthly amounts (for example, sales tax or amounts that have been deducted from the wages of employees).

In a private agreement between a commercial creditor and a debtor which involves acceptance of a lesser sum in full satisfaction of a debt, the commercial creditor, in consideration for payment of the lesser sum, can opt not to deal with the debtor again (and would reduce the chance of any future financial loss) and would usually grant a legal discharge of the balance of the debt such that, in law, it no longer existed. The Commissioner, however, does not have the same power.

The Commissioner has advised the present policy of the ATO is not to agree to an informal `commercial' settlement of taxation debts. Debtors can exercise their rights under the formal `settlement' provisions of either Part X of the Bankruptcy Act 1966 or Part 5.3A of the `Corporations Law' if they wish to seek a settlement.

ATO collection staff are aware of the formal `settlement' provisions of both the Bankruptcy Act 1966 (Part X) and the `Corporations Law' (Part 5.3A). These provisions are an alternative to bankruptcy or liquidation and:-

   provide relief for an insolvent debtor;

   generally treat all creditors equally; and

   provide for a fair and equitable distribution under an arrangement that can be voted on by all creditors.

The Commissioner is an unsecured creditor in relation to taxation debts and collection staff are aware he has the same discretion as any other creditor to either agree to, or oppose, any proposed deed put forward to creditors under either Part X of the Bankruptcy Act or Part 5.3A of the `Corporations Law'. Any proposal put forward is considered by staff on its merits.

When considering whether or not to vote in favour of a particular deed, staff generally take into account issues such as:

   normal commercial practices to the extent it is appropriate to apply those practices to the recovery of taxation debts;

   the likely net return;

   the recommendations of the trustee or deed administrator;

   whether there are alternate remedies a trustee or administrator should pursue (for example, whether directors of a company have been involved in insolvent trading);

   in the case of a company deed, whether the directors of the company have a past history of putting companies into administration to avoid their responsibilities as directors;

   public interest considerations in relevant cases; and

   the particular restrictions of any proposed arrangement.

The Commissioner has advised policy in this area is currently under review as part of the overall review of ATO debt collection policies.

(4) The Commissioner has an obligation to collect the revenue; he expects taxpayers (including corporates) to arrange their affairs so that they can meet their liabilities as and when they fall due for payment. If a tax debt is not paid by the due date for payment and the debtor does not contact the ATO, the Commissioner can only make the assumption the debtor is not going to pay and put in place action to deal with that debt.

That action may include personal, telephone or written contact, the issue of garnishee notices, the issue of orders preventing a debtor's departure from Australia until a debt is paid, legal action up to and including the bankruptcy of an individual or the liquidation of a company, accepting payment of the debt over time, recovering from the personal assets of company directors, writing-off debts considered uneconomical to pursue and inviting applications for a release from income tax and fringe benefits tax debts, which are determined by a Taxation Relief Board.

(a) The decision to proceed to bankruptcy or liquidation is not taken lightly. In some cases, it is relevant to consider the impact of bankruptcy on other creditors, but generally, this could not be said to be a dominant consideration. Indeed, it is unlikely commercial creditors would consider the impact of their actions to recover on the Commonwealth revenue.

(b) The interests of all creditors are considered under the alternates provided in the Bankruptcy Act 1966 and the `Corporations' Law. An informal `commercial' settlement by its very nature would not reflect the interests of other creditors. The Commissioner advised this is one of a number of issues under consideration for the policy review on the question of `commercial' settlements.

(5) The Commissioner advises it is not his policy to push taxpayers into bankruptcy in order to close the particular file. He indicated that on average, an administration takes three years to finalise.

Bankruptcy is only one of a number of ways of dealing with debts and is a valid activity that is used by commercial creditors. The Commissioner does not pursue bankruptcy as a matter of course; on the other hand, he does not resile from using this mechanism when considered appropriate. Bankruptcy does provide some benefits for debtors in that they can start afresh without any financial worries when their bankruptcy is finalised.

The onus is on debtors to demonstrate they cannot pay on time and the Commissioner expects those debtors to approach him with an offer of payment. That offer should:-

   set out the reasons for non-payment on time;

   provide a detailed statement of the current financial position (including details of what steps have been taken to obtain funds to meet the debt and what arrangements are in place to pay other creditors);

   provide sufficient information to satisfy him payment can be made by instalments without the debt escalating other than by the amount of the accruing additional charges (which would mean debtors will need to be able to show the steps taken to ensure future debts will be met as and when they fall due); and

   be accompanied by an initial payment as a sign of genuineness and commitment to pay.

(6) The decision on the most appropriate recovery action is very subjective and is based on a perception of how best to deal with a particular case to maximise the return to revenue. That subjective decision making process takes into account a number of issues, including:-

   the circumstances that led to the inability to pay and the effect of requiring immediate payment;

   the current financial position and other current payment obligations;

   the offer made and the ability to meet payment of the debt and the additional charges for late payment imposed by legislation on those terms without seriously impacting on the ability to meet other obligations;

   whether there is a likely risk to the revenue by accepting payment by instalments;

   the solvency of the debtor and arrangements made with other arm's length creditors to pay debts;

   compliance with other taxation obligations or commitments (for example, whether lodgments are up to date) and the history of the debtor's prior dealings with the ATO; and

   whether there are alternative economic collection options that may see payment in a shorter time frame (for example, the use of `garnishee' provisions).