Late last year, the Australian Taxation Office (ATO) advised thousands of taxpayers and their agents they had an outstanding historical tax debt. The only problem is that many did not know the tax debt existed.

The ATO can only release a taxpayer from a tax debt in limited situations (e.g., where payment would result in serious hardship). However, the ATO will sometimes decide not to pursue a debt because it isn’t economical. In these cases, the debt is placed “on hold”, but it isn’t extinguished and can be re-raised on the taxpayer’s account in the future. For example, these debts are often offset against refunds that the taxpayer might be entitled to. However, during COVID, the ATO stopped offsetting debts, and these amounts were not deducted. 

In 2023, the Australian National Audit Office advised the ATO that excluding debt from being offset was inconsistent with the law, regardless of when the debt arose. By this stage, the ATO’s collectible debt had increased by 89% over the four years to 30 June 2023.

In response, the ATO contacted thousands of taxpayers and their agents, advising them of historical debts that were “on hold” and informing them that the debt would be offset against any future refunds. These historical debts were often across many years, some before 2017, and ranged from a few cents to thousands of dollars. For many, the notification from the ATO was the first inkling they had of the debt because debts on hold are not shown in account balances as they have been made “inactive”. In other words, taxpayers were accruing debt but did not know as the debts were effectively invisible because they were noted as “inactive.”

In a recent statement, the ATO said: “The ATO has paused all action in relation to debts placed on hold prior to 2017 whilst we review and develop a pragmatic and sensible way forward that takes into account concerns raised by the community.

It was never our intention to cause frustration or concern. It’s important to us that taxpayers have trust in our tax system and our records.”

For any taxpayer with a debt on hold, it is important to remember that just because the ATO might not be actively pursuing recovery of the debt, this doesn’t mean that it has been extinguished.

Small business tax debt blows out

Out of the $50bn in collectible debt owing to the ATO, two-thirds is owed by small businesses. As of July 2023, the ATO returned to its “business as usual” debt collection practices. The debt will be disclosed to credit reporting agencies for entities with debts above $100,000 that have not entered into debt repayment terms with the ATO. 

If your business has an outstanding tax debt, it is important to engage with the ATO about this debt. Hoping the problem just goes away will generally make things worse.

If you are at all concerned about an existing or potential tax debt, contact us to discuss your options.