Ombudsman slams ATO’s “excessive” debt-collection practises in scathing report

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Small business ombudsman Kate Carnell has called for the introduction of arbitration in the franchising code.

Small business ombudsman Kate Carnell is calling on the ATO to cease debt-recovery action against firms disputing their bills and wants new external oversight over garnishee notices.

Detailing findings from a seven-week investigation into the ATO’s use of debt recovery on Monday, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has concluded the tax office has been “excessive” in the use of its powers.

The review was sparked early last month over concern small businesses with ongoing Administrative Appeals Tribunal (AAT) cases against the ATO are being pursued with “business killing” garnishee notices, which allow the tax office to strip funds directly from bank accounts.

Carnell says businesses can be left unable to pay wages, rent, suppliers or bank loans, effectively leaving them dead in the water.

“They put small business out of business,” Carnell tells SmartCompany.

“Even if they win the dispute they’re dead, they’re gone.”

“Extraordinarily high figure”

While the ATO maintains the use of debt-recovery action — including garnishees, director’s penalty notices, statutory demands, and sequestration or winding up applications — is “very rare” during an active dispute, the report found these powers were used in at least 12% of cases during 2017-18.

Carnell says the evidence she’s gathered so far appears to “contradict” the ATO’s line, establishing a case for a broader review of debt recovery that considers disputed debt not before the AAT.

“I don’t think that’s very rare,” Carnell says.

“When you think about the outcomes of these results, of these sorts of practices, that’s an extraordinarily high figure.”

The tax office says it only recovers disputed tax debt in “exceptional circumstances”, such as where there’s evidence of criminal activity or risk funds intended for government coffers could be dissipated or transferred.

Of the 17 cases where recovery action was undertaken on disputed debt in 2017-18, three, valued at $1.49 million in debt and penalties, were initiated while AAT action was already underway.

“For the vast majority of small businesses who have a disputed debt, we will not enforce recovery of a tax debt, including even parts of the debt which are not in dispute,” the ATO said in its submission to the report.

Garnishees cause “stress and anxiety”

Tax office use of garnishee notices has been under scrutiny for some time. Last month the Inspector General of Taxation (IGTO) released a report examining allegations made by Four Corners last year about heavy-handed tactics being employed.

The review found there was no evidence the ATO engaged in a “small-business cash grab” but did identify one case where a manager ‘joked’ with colleagues about issuing the business-crushing notices.

Small-business accountant Stacey Price, owner of Healthy Business Finance, says she’s had clients receive garnishee notices after being a week late on their payment plans.

“This puts even more stress and anxiety on the business owner, who is usually trying to do the right thing,” Price tells SmartCompany.

We have had serious and threatening debt recovery letters and SMS be sent to clients when activity statements are not even overdue yet as the ATO has not taken into account the extended lodgement timeframe BAS [Business Activity Statement] agents get for their clients.”

A commercial electrical contractor used as an example by the ombudsman allegedly lost seven of its major clients after they were issued garnishee notices by the ATO, requiring them to withhold 50% of claims payable to the business.

The business later ceased operation, terminating 90 workers.

Calls for check on ATO garnishee power

In total, the ombudsman has made 11 recommendations calling for an overhaul of the way the ATO administers debt-recovery powers, including mandating external oversight and approval for garnishee notices.

The report suggests the court system could be employed to require the ATO to obtain approval, or at least make a preliminary case to a third party, before being able to utilise its garnishee powers.

Further, Carnell wants the next federal government to change the law so businesses with active AAT disputes can apply for stay orders on debt recovery.

“They don’t have to prove to anybody that their concerns are valid,” Carnell says.

“The police don’t have that much power.”

The ombudsman also wants the ATO to do a better job educating businesses about dispute resolution options, implement tailored tax payment plans for small businesses, and consider alternative forms of debt security which avoid garnishees.

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