The Commonwealth and Taxation Ombudsman, Prof. John McMillan, today released a report on the re-raising of written-off income tax debts by the Australian Taxation Office.

‘Complaints to my office raised concern about the operation of ATO policies to re-raise income tax debts which were written off many years earlier. Often taxpayers are unaware that they still have a collectable debt,’ said Prof. McMillan.

‘The term ‘write-off’ is confusing for taxpayers. Unlike the commercial meaning of the term, it only reflects a decision not to pursue the debt for a period of time and can be reversed if and when the ATO considers that the person’s circumstances have changed.’

‘The main trigger for the ATO deciding that a person’s circumstances have changed is if the taxpayer submits a tax return which results in a credit of $500 or more,’ said Prof. McMillan. ‘For example, in one case a person returned to part-time work after being on a disability pension for over 27 years, and her income tax return yielded a credit of over $800 from income of about $6,000. Instead of receiving this amount, her credit was offset against a tax debt she had incurred some 20 years earlier.’

The Ombudsman’s investigation showed that there is scope for the ATO to improve its administration of debt re-raise decisions. ‘As a sole criterion, the current arbitrary $500 tax credit as the trigger for re-raising written-off debt is too blunt an approach,’ said Prof. McMillan. ‘It biases the selection of re-raised debts towards low income earners who receive tax rebates such as the low income off-set and does not appropriately take account of the taxpayer’s situation or the original reason for debt write-off.’

The Ombudsman also found that the ATO can also improve its taxpayer notification and recordkeeping practices. The quality of the ATO’s initial approach to management of debt cases and administration of write-off decisions is also relevant to reducing problems with debt re-raise. The ATO’s current approach to more actively manage debts earlier is a positive way to enhance the decision making about debt write-off and the fairness of debt re-raise.

The Ombudsman recommended a number of administrative measures to better inform and ensure more appropriate outcomes for taxpayers. ‘I acknowledge the ATO’s willingness to enhance its administration of debt re-raise policies and procedures and am pleased that the ATO has substantially accepted my recommendations,’ said Prof. McMillan.

The ATO has said that it will change procedures to provide taxpayers with more information about the source of the debt and the basis for re-raise action. The ATO also recognised the need to ensure that criteria for deciding to re-raise a debt are clearly related to whether it is economical, efficient, effective and ethical to do so. The ATO has also said that debts written-off more than seven years ago will not generally be re-raised and that it will implement more structured guidelines to ensure that debt re-raise outcomes are appropriate to taxpayers’ individual circumstances.

The Ombudsman acknowledges the scale of ATO debt recovery activity is significant, and recognises that relatively few complaints arise from the 2,700 cases re-raised on average each year.

Download the report: Australian Tax Office: Re-raising written-off tax debts.

Media contact:

Media 02 6276 3759

For further information or to arrange an interview with Prof. McMillan phone 02 6276 0133.

Date of release: 27 March 2009