Management of Small Business Tax Debt
Entities audited: Australian Taxation Office
Introduction
5.1
Small business tax debt accounted for nearly two thirds of collectable debt in 2017-18, amounting to $15 billion. The 3.8 million small businesses registered in the tax system in 2017-18 contribute 16 per cent of income tax collected by the Australian Taxation Office (ATO).
5.2
This significant level of debt makes debt collection from small businesses a key activity for the ATO. Debt actions vary in degree, beginning with softer actions such as reminder letters and telephone calls, and escalating to ‘firmer’ and ‘stronger’ actions such as garnishees, director penalty notices, wind-ups and bankruptcies.
5.3
In addition, the ATO has a range of educational material designed to inform small business about tax liabilities in order to prevent them from acquiring a tax debt. They also run support and assistance programs, such as SMS, letter and telephone reminders and support through payment plans, to assist small businesses to pay debts on time or to avoid referral to debt collection agencies.
5.4
The methods of debt collection used by the ATO and the consistency of their application were called into question in an episode of the ABC program Four Corners, which aired on 9 April 2018. Following the program, a number of reviews were undertaken into ATO debt collection practices, including by the Inspector-General of Taxation, the Department of the Treasury and the House of Representatives Standing Committee on Tax and Revenue.
Audit Scope
5.5
In response to the Four Corners episode, the Commissioner of Taxation requested that the Australian National Audit Office (ANAO) undertake an audit into the effectiveness of the ATO’s approaches to debt collection from small business.
5.6
The objective of the ANAO audit was to assess the effectiveness of the ATO’s management of small business tax debt arising from compliance activities. The high-level audit criteria were, the ATO:
has effective arrangements for managing small business tax debt arising from compliance activities;
has processes that provided for consistent management of small business tax debt arising from compliance activities; and
effectively monitors and reports on the collection of small business tax debt arising from compliance activities.
5.7
The audit examined whether the ATO’s administrative processes and systems support consistent treatment of small business tax debt, particularly in relation to firmer and stronger debt recovery action.
5.8
The ANAO noted that current ATO systems are unable to provide separate aggregated reports on small business debt arising from compliance activities. As a result, the audit generally focussed on the effectiveness of the ATO’s management of small business tax debt in its entirety.
5.9
The ANAO reported the cost of the audit was $625 000 and the audit team consisted of four members.
Overall Audit Conclusion
5.10
The ANAO audit found:
the ATO’s management of small business tax debt has been largely effective, and is supported by comprehensive strategies and processes;
the ATO’s organisational structures and processes support the effective management of small business tax debt and there is improved coordination across small business compliance, dispute and debt activities;
there are limitations on the effectiveness of the ATO’s processes that support consistent management of small business tax debt and quality assurance processes over firmer and stronger debt actions do not provide sufficient visibility about the effectiveness of controls; and
the ATO’s framework for monitoring and reporting of its management of small business tax debt is largely effective, however improvements could be made to provide the better inform the Parliament and the public about debt trends.
5.11
The ANAO made two recommendations, both of which were agreed by the ATO. The first relates to improving the quality assurance arrangements for debt activities, including better understanding the extent to which administrative errors impact on the taxpayer or tax revenue. The ANAO also suggested the ATO revise sampling methodologies and refine reporting to enable identification of systemic issues.
5.12
The second recommendation is to make improvements to the performance framework for debt management. The ANAO suggested the ATO more clearly articulate the activities and improvements to performance measures and include additional measures of effectiveness such as debt recovery rate, efficiency of debt management operations and coverage of consistency.
Governance
5.13
Rules governing tax debt are prescribed by law. Monitoring adherence to these laws is the remit of the ATO’s compliance team. Compliance activities include audits of taxpayer records to determine the accuracy of tax calculations. The Small Business line is a specific business line to manage compliance for small business, providing advice, taxpayer education and support, and auditing of high-risk cases.
5.14
Compliance activities, dispute resolution and debt recovery are managed by three separate groups of the ATO and work is ongoing to achieve the right level of coordination between each area, while ensuring autonomy and independence in decision making. Effective coordination across the three groups is essential to support the experience of the taxpayer and the collection of the required amount of tax.
5.15
The ATO has well-defined and comprehensive processes for compliance, dispute and debt management activities applying to small business. Procedures and guidance material for staff have been developed and refined over time to assist staff in decision-making. Initiatives such as Payment Thinking have been introduced to strengthen collaboration between groups and to ‘make payment an easy and natural part of activities across all stages of tax and superannuation’.
Risk Management
5.16
The assessment of risk is a key component of many compliance, dispute and debt management activities. Risk assessment provides a sound basis on which decisions can be made about possible treatments and allows the ATO to focus its resources and responses to non-compliance in ways that are commensurate with the relevant risks. For example, compliance activities are targeted based on the assessment of risk factors including discrepancies and errors in reporting, the risk profile of the industry of the taxpayer, non-lodgement and unexplained wealth.
5.17
The Debt team uses a risk based approach to the allocation and checking of work where risk is determined by a staff member’s expertise. Once a team member is deemed proficient in a task, their work is no longer subject to checking, except for routine random quality assurance processes. As a result, the workflow system is such that it uses a log of a staff member’s skills to allocate work automatically from both the high volume/low risk debt cases and those requiring firmer or stronger actions.
5.18
There is also a risk based approach to debt pathways and selection for treatment. The Debt Right Now! collection model uses a risk assessment based on the taxpayers ‘capacity to pay’ and ‘propensity to pay’ to identify where, in a liner series of treatments, the debt collection process will begin. Once in the pathway, all taxpayers are treated equally in the sense that they must progress through the same series of treatments. The ANAO, however, noted that although risk determines where in the pathway a particular debt may begin, this process does not differentiate based on risk once the debt has entered the pathway.
5.19
Purposeful First Action uses a risk-based model to assign taxpayers to a treatment pathway based on compliance history and past behaviour. The pathways are similar to those in the Debt Right Now! collection model, however, they differ in terms of which steps are taken and which are missed. The pathways therefore correspond to the level of risk and vary the time taken to get to firmer and stronger actions. These pathways, including the timing, are determined by predictive analytics in accordance with the ATO’s tailored approach to debt.
5.20
A risk-based approach is also taken to the recovery of disputed debt. Where the dispute is considered ‘genuine’ with a lower non-payment risk, the ATO’s policy is not to pursue the debt until the dispute is resolved. The Significant Debt team has similarly proposed a risk-based matrix for triaging serious debt cases that may require legal action to allow more timely intervention.
Performance Measurement and Management
5.21
In addition to governance frameworks that set out processes and procedures, it is important that any system has appropriate controls and measures in place to support consistency and instil confidence that decisions are correct. This includes quality assurance processes for the management and oversight of risk and performance reporting that identifies opportunities for systemic improvements.
Consistency
5.22
Consistency in the treatment of small businesses in relation to actions undertaken for debt recovery was a key issue raised in the Four Corners episode. In recent times, the ATO has taken steps to increase the consistency of debt recovery treatments, including the consolidation of debt management activities in a single business line and continual improvement and development of procedures and guidance material to assist staff in consistent decision-making.
5.23
There are, however, inconsistencies in the treatment of different taxes. For example, debt relating to Business Activity Statements is treated under the Purposeful First Action strategy, whereas income tax and Superannuation Guarantee debt is treated under Debt Right Now! This means that although debtors may be in similar circumstances, they are treated differently because they have different types of debt.
5.24
In addition, the application of different debt strategies leads to significant variations in the time taken to get to firmer and stronger actions. Generally, those treated under Purposeful First Action (relating to Business Activity Statement debt) will move more quickly to firmer and stronger actions than those treated under Debt Right Now! (income tax and Superannuation Guarantee debt). It is important to note that during this time, the taxpayer is accumulating interest on the debt.
5.25
In relation to this issue of consistency of time taken to move through different treatment pathways, the Auditor-General noted the following:
Key issues for the consistency of automated debt processes are not so much the sequence of warning prompts, but the time taken to reach firmer and stronger action for debtors with a similar debt nature and history profile, and then the application of those actions. With respect to timing, the ATO could examine whether the difference in time to firmer and stronger action in the six pathways is warranted.
5.26
The ATO stated that issues relating to the consistency between debts, the timing of debt pathways and different treatment strategies are likely to be resolved in early 2020 by a planned system upgrade that merges the two accounting systems currently in use to a single system:
In terms of the six pathways, we're looking to apply those in the future. As the deputy commissioner pointed out, from January we'll apply that consistently across both the income tax product and the activity statement product. In that sense, there will be a consistency of action once we move all our accounts onto a single accounting system. We will maintain some of the six pathways going forward, though, because we recognise there's a difference between someone for whom this is the first time they've come into debt with the ATO and someone who may well have been in debt repeatedly in the past and who cycles around. What the new system does is that it recognises the interaction that's most likely to engage that taxpayer and resolve the debt, and, instead of going through three or four steps before that, we will look to move to one that's closer to what's worked for that taxpayer in the past. The analytics will certainly help us to see that behaviour, shape that and trigger that action.
Quality Assurance
5.27
The systems used by the ATO allow significant discretionary decision making by debt officers, particularly in relation to firmer and stronger actions. As a result, quality assurance is a critical control to provide confidence that these decisions are correct.
5.28
The Service Delivery Group, responsible for debt management and recovery, implemented the Service Delivery Quality Framework in December 2014, consisting of two components: Service Delivery Quality and Coaching and the Service Delivery Assurance Program. Service Delivery Quality and Coaching is a quality assurance framework that identifies staff training and coaching requirements. The database comprises one random activity or telephone interaction from each staff member each day and the regularity of assessment is based on a staff member’s previous performance. The results are provided to staff and inform coaching by team leaders.
5.29
The Service Delivery Assurance Program uses the results of the Service Delivery Quality and Coaching framework to report on eight firmer and stronger actions. Results include an overall assessment of whether the standard was met, or not, for each assessment. Issues leading to a ‘standard not met’ assessment can range from minor administrative errors (for example, poor note keeping) to actions with a more direct impact on the taxpayer. Data on the type of error identified by the assessment is not captured.
5.30
ANAO analysis of the Service Delivery Assurance Program data found that the number of assessments tested each quarter did not always meet the sample size suggested by the National Statistical Service Calculator. As a consequence, assurance taken by the ATO from the work done in relation to the Service Delivery Assurance Program does not have a sound statistical basis. This stems from the fact that the number of assessments undertaken for each treatment are taken from the Service Delivery Quality and Coaching framework, which uses staffing numbers and the nature of work each operator undertakes to determine sample size. This does not align with the suggested sample size for quality assurance purposes.
5.31
The ANAO therefore found that the Service Delivery Assurance Program has significant shortfalls from an assurance perspective. The ATO did not separately define a purpose and objective for the Service Delivery Assurance Program, or document how the coaching-based assessments aligned to business risks. As a result, the ANAO suggests that the Service Delivery Quality Framework be revised with a clearer methodology in relation to sampling to ensure alignment to business risks. It is also important that the revised framework capture information about the types of errors made by staff to enable any reporting to clearly distinguish errors that result in an adverse outcome for the taxpayer, the ATO or both parties.
5.32
In addition, the revised framework should include tolerances for errors in firmer and stronger debt recovery actions. The level of tolerance is an important parameter in the design of quality assurance arrangements, as quality assurance measures should be more extensive the lower the tolerance. The ATO informed that revisions to the Service Delivery Framework, in line with ANAO recommendations, would be complete by December 2019.
5.33
A second quality assurance program is ATO Quality which provides oversight of quality for the whole ATO. Like the Service Delivery Framework, ATO Quality originally aligned quality assurance testing with staff capability and coaching without considering risk in light of consequences to the taxpayer and the accuracy of tax collected. Revisions to the methodology in 2017-18 mean that trends can no longer be analysed and instead, reporting focuses on area for improvement by theme. The ANAO recommended improvements to ATO Quality along similar lines to those suggested for the Service Delivery Framework.
Reporting
5.34
The Debt team has comprehensive processes for monitoring and reporting of overall tax debt as well as small business debt. This information is largely used for internal reporting to various internal stakeholders. This data provides valuable insights that could be more fully included in external reporting to better inform the Parliament and the public about debt trends.
5.35
In relation to the Service Delivery Framework described above, quarterly quality assurance reports are issued detailing assessment of the eight firmer and stronger debt treatment activities. These reports include the recommended sample size, number of completed assessments, analysis of findings against each of the eight criteria and an overview against these findings. The reports also summarise the corrective actions taken in that quarter, main issues and recommendations. In its recommendation, the ANAO suggested that the revised Service Delivery Framework include ‘reporting on trends over time in assessed levels of conformance against specified tolerances for errors in important administrative actions such as firmer and stronger debt recovery actions’. This is especially important in identifying errors that had a significant impact on small businesses.
5.36
Reporting is not provided separately for debt arising from compliance activities. To help assess the effectiveness, efficiency and consistency of its end-to-end debt management processes, the ATO could consider additional reporting for debts arising out of compliance activities. The ATO does not currently have visibility of its performance in recovering such debts. In the absence of such data, the ATO cannot identify trends to inform its management of debts arising from compliance and how these differ from the management of debt more generally.
5.37
In broader terms, comparison of small business debt has been complicated by changes over time in the definition of small business. In 2015–16, the small business market segment was defined as ‘those businesses with a turnover of less than $2 million’. In the 2017–18 Federal Budget, the Government increased the threshold for small business concessions to $10 million turnover. This change had retrospective effect from 1 July 2016.
5.38
The ANAO report states that despite these changes, the ATO’s Annual Report 2016–17 defined small businesses as those with a turnover of less than $2 million, while the Annual Report 2017–18 did not include a definition of small business. In 2017–18, the ATO adopted a ‘client experience’ measurement approach, whereby the small business population expanded to include sole traders and other individuals linked to a small business (with a turnover of less than $10 million). The ATO continues to report small business data using various parameters.
5.39
In addition, the ATO stated that:
There is no consistent definition of small business across government and/or the private sector. Administrators and regulators use different definitions to enable them to enact the relevant laws they administer.
5.40
To support improved data analysis, the ANAO recommended that the ATO should clearly define and consistently apply the term ‘small business’ as a consistent definition of small business would support improved data analysis.
Performance Measures
5.41
The Debt Business line plan, Debt Overview 2018/19 – Our Priorities, sets out the ATO’s approach to debt management as a whole, which includes debts relating to small business. The purpose of the plan is articulated as follows:
We take a purposeful approach to improving payment on time, balancing support for clients trying to do the right thing with timely stronger action against those who don’t engage to prevent them gaining an unfair financial advantage.
5.42
The ANAO found that there is an absence of initiatives articulated in the plan to demonstrate how Debt will achieve its purpose of ‘balancing support for clients trying to do the right thing with timely stronger action against those who don’t engage’. While some initiatives in the plan identify specific actions and outcomes, these are generally very broad and not necessarily measurable. Articulating the specific actions to undertake and results to achieve, including relevant timeframes, will assist the ATO in determining how it will meet its purpose for debt management.
5.43
The ATO advised that measurement of its effectiveness and efficiency in managing debt is dependent on its ability to obtain reliable data on the amount of debt raised and collected. Such data would provide visibility of the debt collection rate. It would also allow the ATO to develop more relevant and reliable measures of resource efficiency based on staff activity and particular measures. Although this data is currently unavailable, the ATO advised that following planned system upgrades in December 2020, the ATO will be able to reliably monitor debt inflow and outflow.
Stakeholder Engagement
5.44
The ANAO audit found that the ATO has effective practices for engaging with both internal and external stakeholders. Internally, the Small Business line runs the Small Business Experience Forum, which is attended by ATO staff from business lines that contribute to the Small Business Experience, including Debt and Review and Dispute Resolution. The ANAO found that ATO staff consider that the level of communication and collaboration across Compliance, Debt and Review and Dispute Resolution has improved in recent years.
5.45
The ATO engages with the community through a network of consultative forums including industry representatives, tax professionals, software developers and business representatives. The ATO also liaises regularly with other tax administrations internationally, and engages in forums such as the International Debt Management Committee to inform changes to debt strategies and processes for all taxpayers, including small business. This enables the ATO to discuss common issues and share better practices in relation to debt with international counterparts.
5.46
The ATO established the Small Business Stewardship Group which aims to provide insight into issues that small business faces and identify opportunities to improve the tax and super systems to make them easier for small business to navigate. The Australian Small Business and Family Enterprise Ombudsman and the Chief Executive Officer of the Council of Small Business of Australia advised the ANAO that this group works well and that the ATO is generally responsive to feedback and issues raised by the group members.
5.47
The ATO engages directly with small business by running Small Business Consultation Panels where small businesses are invited to participate in workshops, research sessions and focus groups. This provides an opportunity for small businesses to give the ATO feedback on various initiatives, processes and documentation from a small business perspective. This program has seen small businesses develop tailored communication initiatives for small businesses.
5.48
Members of the Small Business Consultation Panel have been asked to join the Small Business Fix-it Squads. The Fix-it Squads are ‘rapid-design projects’ where small business owners, representatives from federal and state government agencies, and intermediaries work together to examine a problem from the small business perspective. These squads are led by the ATO but are a cross-agency and business initiative to improve the small business experience. This initiative improves relationships between the ATO and the small business sector and provides sector-focused solutions to particular problems.
Concluding Comment
5.49
The Committee acknowledges the Auditor-General’s conclusion that on the whole, the Australian Taxation Offices’ (ATO) management of small business tax debt is largely effective. The Committee welcomed the ATO’s assurance that it is continually striving to update approaches, processes and systems for the collection of tax debt. The Committee notes that the ATO has already undertaken significant work to address many of the findings of the Auditor- General, including revisions to both quality assurance programs, Service Delivery Framework and ATO Quality.
5.50
The Committee acknowledges the work being done by the ATO to engage with stakeholders from the small business community, peak bodies, other government agencies and international counterparts to better understand the issues facing small business and improve the experience of the tax system for small business.
5.51
The Committee agrees with the ANAO suggestion that the ATO should consider additional reporting for debts arising out of compliance activities. Segregating results for compliance-raised debts, and those arising through ‘natural processes’, would indicate the extent to which increased compliance activity is influencing total debt levels.
5.52
The Committee acknowledges that the planned ATO system upgrade in December 2019 is significant, and should it be successful, will lead to substantial progress towards many of the improvements suggested by the ANAO.
5.53
The Committee recommends that the Australian Taxation Office (ATO) consistently apply a clear definition of the term small business within the ATO to improve data analysis.
5.54
The Committee recommends that the ATO develop systems so it can separately report on debt arising from compliance activities, to help assess the effectiveness, efficiency and consistency of its end-to-end debt management processes.