Collection and recovery of disputed debts

The following terms are used in this Practice Statement:

A tax-related liability that is due and payable is a debt due to the Commonwealth and payable to us. [3] We can take action to recover such a debt even where it is disputed, that is, where the taxpayer has lodged an objection, application for review or appeal disputing the liability. [4]

Our ability to recover a tax debt where a dispute is on foot is an important feature of the tax system. It ensures that disputes are not used as a mechanism to inappropriately delay or frustrate the payment or recovery of tax and it gives the community confidence that the right amount of tax is not only assessed but also collected.

Our approach to the collection of disputed debts considers each taxpayer's individual circumstances and the need to prevent those who do not pay on time from gaining an unfair financial advantage over those who do. The decisions and actions we take must be consistent with the commitments in Our Charter .

While we expect tax debts to be paid on time, we recognise that taxpayers have the right to dispute their liability through the objection, review and appeal processes. This means that additional considerations apply in managing the collection of disputed debts over and above those that apply when a debt is not disputed, and we tailor our approach accordingly.

We require large business and wealthy group taxpayers with a disputed debt to either pay their debt in full or enter into a 50/50 arrangement (as discussed at paragraphs 25 to 44 of this Practice Statement).

Where a large business or wealthy group taxpayer with a disputed debt does not pay their debt in full or enter into a 50/50 arrangement, we may take action to secure payment of the disputed debt before the dispute is resolved.

This approach recognises the significance of large business and wealthy group taxation payments to Commonwealth revenue collections and the critical role of that in maintaining community confidence in the tax system.

For other taxpayers, where there is a dispute about a taxpayer's liability, any recovery action we take is based on an assessment of the risk the case poses to the revenue, taking into account the taxpayer's individual circumstances. This risk assessment is a fundamental part of the disputed debt process and continues during the various stages of a dispute, while a disputed debt remains unpaid.

In cases where a taxpayer's tax affairs are straightforward and the risk to the revenue is low, we will not take recovery action in respect of a disputed debt while an objection, review or appeal is on foot.

Taxpayers in this position may wish to enter into a 50/50 arrangement to reduce their exposure to GIC.

In some cases, based on a careful risk assessment, we may determine that the risk associated with a case is serious enough that it necessitates action to secure the payment of the disputed debt before the dispute is resolved. In such cases, we will generally work with the taxpayer to explore other options as an alternative to initiating recovery action. These options may include agreeing to the payment of the debt by instalments and, in exceptional cases, to the provision of security in lieu of payment until the dispute is finalised. These arrangements can provide an appropriate level of protection to the revenue without the need to resort to recovery action.

It is rare for us to initiate recovery action for a disputed debt. However, in a small number of cases, based on a careful risk assessment, action to recover all or part of a disputed debt may be taken. This will typically happen in high-risk cases where there are links to organised crime, phoenixing or other fraudulent activity, or where there is a serious concern about the dissipation of assets or the ability to pay in the event that the taxpayer is unsuccessful in the dispute. It may also happen where the taxpayer's objection is frivolous or without merit and the dispute is being used to inappropriately delay or frustrate the recovery of tax.

In all cases, we encourage taxpayers to talk to us about their individual circumstances where they have a disputed debt that remains unpaid after the due date. We are committed to improving the experience of taxpayers when dealing with us and this is especially so for taxpayers who are in a dispute with us. We recognise that when disputes are not managed well, the effects can be long-lasting and costly. Our approach to the collection of disputed debts aims to provide the most appropriate outcome in the circumstances of each case.

Any action that we take in managing a disputed debt is based on an assessment of the risk that the case poses to the revenue, taking into account the taxpayer's individual circumstances. The concept of risk to the revenue covers 'capacity to pay' but extends to other considerations as well. For example, depending on the taxpayer's circumstances, it may include consideration of the taxpayer's behaviour, whether there is a genuine concern about the dissipation of assets or whether the taxpayer's objection or appeal is reasonably perceived to be used as a delay tactic.

Our risk assessment process is based on the principles contained in Law Administration Practice Statement PS LA 2011/6 Risk management in the enforcement of lodgment obligations and debt collection activities.

In undertaking a risk assessment, we consider the factors contained in paragraph 22 of PS LA 2011/6. These include but are not limited to: • the subject matter of the dispute including whether it may reflect a non-compliant attitude to taxation and superannuation laws • whether a minimum of 50% of the debt in dispute has been paid (which would indicate good faith), reducing the GIC and lowering the perceived level of risk (see '50/50 arrangement' at paragraphs 25 to 44 of this Practice Statement), and • any significant change in the taxpayer's financial position since the raising of the debt (that is, any evidence of dissipation or alienation of assets).

We also consider additional factors, such as: • the taxpayer's compliance history • the size of the disputed debt and any other tax debts that remain unpaid • the taxpayer's willingness to provide information necessary for the resolution of the dispute • the taxpayer's willingness to cooperate with us • the extent to which the taxpayer's rights are being genuinely pursued so as to advance the dispute in a timely manner • the merits of the taxpayer's case, including whether the subject matter of the dispute has been decided by a court or tribunal in our favour in a substantially similar case • the age of the debt in dispute • the growth of the debt by accumulation of GIC • whether the taxpayer's case is frivolous or without merit [5] • whether there are reasonable grounds to think that the dispute is being used to inappropriately delay or frustrate the recovery of tax • whether the action of a taxpayer may be prejudicial to their ability to pay or our recovery position (for example, restructuring of affairs) • whether the taxpayer is otherwise up to date with their tax lodgment and payment obligations • whether the taxpayer has the financial capacity to meet their tax-related liabilities or to comply with an ongoing payment arrangement, and • whether the dispute has been commenced at the later stages of recovery, as this may indicate a risk to collection.

We will initiate recovery action prior to the determination of an objection if the circumstances of the case indicate an unacceptable level of risk. Similarly, where a review or appeal is on foot, recovery action will be initiated before the dispute is finalised if the circumstances of the case indicate an unacceptable level of risk. Situations where this may occur include where: • there is evidence that the taxpayer is involved in organised crime, phoenixing, or other fraudulent activity • there is a serious concern about the dissipation of assets or the taxpayer's capacity to pay in the event that the taxpayer is unsuccessful in the dispute, or • the taxpayer's objection is frivolous or without merit and the dispute is being used to inappropriately delay or frustrate the payment of tax.

The risk assessment process is a fundamental part of managing disputed debts and an assessment is regularly revisited throughout all stages of a dispute while a debt remains unpaid. The fact that a case is initially determined to be low risk does not mean that it may not be determined to be high risk at a later stage. Additional facts or considerations may emerge during a dispute which indicate that recovery action is necessary.

For example, we might initially risk-assess the non-payment of a debt in relation to a lodged objection as acceptable. However, during the objection process, the objecting taxpayer may act inconsistently with the proper and timely advancement of the dispute - for example, by making repeated extension requests or failing to provide evidence or information reasonably required resulting in delay. The lack of genuine pursuit by the taxpayer of their objection rights may, in turn, factor into a reassessment of the debt recovery risk as unacceptable.

The majority of cases where there is a disputed debt involve taxpayers whose tax affairs are straightforward and the risk to the revenue is low. In such cases, we will not take action to recover a disputed debt while an objection, review or appeal is on foot.

However, the law incentivises the prompt payment of tax debts by imposing GIC on debts which remain unpaid. This includes tax debts that are disputed. GIC continues to accrue on such debts even while a dispute is on foot.

We encourage taxpayers with a disputed debt to talk to us about their circumstances and about entering into a 50/50 arrangement to manage their disputed debt, including their exposure to GIC. [6]

Subject to a risk assessment, we will generally allow a taxpayer with a disputed debt to enter into a 50/50 arrangement to limit their exposure to GIC.

A 50/50 arrangement can provide a mutually beneficial outcome for the taxpayer and us. For the taxpayer, it minimises their exposure to GIC which would normally be payable on an amount of a disputed debt that remains unpaid. For us, it helps protect the revenue by ensuring that part of the disputed principal tax debt is collected in a timely way.

A 50/50 arrangement requires the taxpayer to: • pay all undisputed tax debts and a minimum of 50% of the disputed principal tax debt • cooperate fully in providing any requested information necessary for the resolution of the dispute within 28 days of the request or another agreed timeframe • pay the whole of any subsequently arising tax-related liabilities that are not in dispute and for which no other deferral of recovery or payment arrangement has been granted, and • meet all subsequent lodgment obligations.

In return, we will: • defer recovery under section 255-5 of Schedule 1 to the TAA of the unpaid balance of the disputed debt until 14 days after (as applicable) - we determine the taxpayer's objection - the relevant tribunal or court hands down its final decision [7] , or - we determine that the risk posed by the case requires recovery action to be taken (see paragraphs 52 to 57 of this Practice Statement), and • remit 50% of the GIC that accrues on the unpaid balance of the disputed debt as described at paragraph 33 of this Practice Statement (this will increase to remission at the rate of 75% if the dispute is subject to the Test Case Litigation Program).

In some cases, we may encourage a taxpayer with a disputed debt to enter into a 50/50 arrangement. A taxpayer can also submit an offer to enter into a 50/50 arrangement with us. In either case, the same considerations apply.

A 50/50 arrangement is generally given effect by way of correspondence from us. The correspondence will detail the circumstances where we may revoke the arrangement in accordance with paragraphs 40 to 41 of this Practice Statement.

The provision of security in lieu of payment will not satisfy the requirements of a 50/50 arrangement.

The amount of any withholding tax remitted by the taxpayer will not be taken into account in setting the amount of the disputed principal tax debt to be paid under a 50/50 arrangement.

Where we and a taxpayer enter into a 50/50 arrangement, the taxpayer will be liable for the GIC as follows: • The disputed debt will be subject to GIC at the full statutory rate from the due date for payment until, but not including, the day the taxpayer pays a minimum of 50% of the disputed principal tax debt. • For the period starting on the day the taxpayer pays a minimum of 50% of the disputed principal tax debt, and ending 14 days after (as applicable) we determine the taxpayer's objection, or the relevant tribunal or court hands down its final decision, we will remit 50% of the GIC (75% if the dispute is subject to the Test Case Litigation Program) that accrues on the unpaid balance of the disputed debt during that period. We will generally remit the relevant amounts after the dispute has been finalised. • From the 15th day after (as applicable) we determine the taxpayer's objection, or the relevant tribunal or court hands down its final decision, the unpaid balance of the disputed debt will be subject to GIC at the full statutory rate until paid in full.

Section 25-5 of the ITAA 1997 provides for the deductibility of GIC. Conversely, subsection 20-25(2A) of the ITAA 1997 requires the taxpayer to return any amount of GIC remitted as recouped income. Under section 20-25 of the ITAA 1997 a credit adjustment to GIC is treated as recouped income. [8]

Taxpayers whose disputed debt is subject to a 50/50 arrangement will effectively be entitled to claim a deduction for 50% of the total amount of GIC incurred over the life of the arrangement. Where we remit the interest at the end of the arrangement, taxpayers who wish to claim a deduction for GIC, when completing their tax return, will need to: • deduct the full amount of GIC accrued during the particular financial year, and • return the amount remitted under the 50/50 arrangement as recouped income in the financial year in which the remission occurs.

A taxpayer is not eligible for a 50/50 arrangement where: • the dispute relates to a debt which arose under the Superannuation Guarantee (Administration) Act 1992; this is because a 50/50 arrangement in such circumstances may negatively impact on employee entitlements • the dispute relates to a diverted profits tax assessment [9] • the tax officer who has responsibility for determining the taxpayer's objection considers it to be frivolous or without merit, or • the proposed 50/50 arrangement would disadvantage the revenue or is not otherwise appropriate having regard to the facts and circumstances of the case.

Where you consider that the proposed 50/50 arrangement would disadvantage the revenue, you should consider proposing an alternative arrangement. The alternative arrangement may involve the taxpayer paying a larger portion of the disputed debt in order to ensure an appropriate amount of revenue is collected.

Where the disputed debt is equal to or greater than $50 million, before proceeding with a 50/50 arrangement, you must first obtain formal approval from both an Assistant Commissioner in the Client Engagement Group and an Assistant Commissioner in Frontline Compliance.

As part of obtaining this approval, you must show that entering into a 50/50 arrangement will not disadvantage the revenue and is otherwise appropriate having regard to the facts and circumstances of the case.

A 50/50 arrangement will be refused or revoked and recovery action may be initiated even before a dispute is finalised where there are reasonable grounds for us to believe that the associated risk requires such action. Situations where this may occur include those detailed at paragraph 19 of this Practice Statement.

The effect of revoking a 50/50 arrangement is that the deferral of recovery action under section 255-5 of Schedule 1 to the TAA will end. Any amounts paid towards the debt will not be refunded and there will be no remission of GIC.

Offsetting occurs when a taxpayer's credit or running balance account surplus is applied to another liability of the taxpayer. We are required to offset all credits a taxpayer becomes entitled to, except in specific situations. In these situations, we have the discretion to refund rather than offset credits.

Relevantly, we have the discretion to refund a credit in situations where we have deferred recovery under section 255-5 of Schedule 1 to the TAA. [10] For further details about our approach to offsetting, see Law Administration Practice Statement PS LA 2011/21 Offsetting of refunds and credits against taxation and other debts.

In relation to credits, such as those arising from subsequent income tax assessments or activity statements, we will generally exercise the discretion to refund such credits rather than offset them against the unpaid balance of a disputed debt where the taxpayer has a deferral of recovery in place under a 50/50 arrangement. However, if there is new evidence since the deferral was granted that there is an unreasonable risk to revenue, the credit should be offset. [11]

If, as part of our ongoing risk assessment process, we identify that a case poses a significant risk to the revenue, we may request a submission from the taxpayer regarding the options available to mitigate the risk.

Where a taxpayer wishes to provide a submission, we will generally require a full and true disclosure of the financial position of the taxpayer and all associated entities upon which the taxpayer can reasonably be expected to rely for financial assistance. In addition to providing this information, the taxpayer may be asked to disclose information such as the name of the owners of properties where the taxpayer resides or conducts business.

Where the risk associated with a case cannot be mitigated to an acceptable degree, we may take action to secure payment of a disputed debt before the dispute is finalised. However, in such cases we will consider the following options as alternative to initiating recovery action: • the payment of the disputed debt by instalments • the payment of 50% of the disputed debt in a lump sum with the balance to be paid by instalments • the payment of 50% of the disputed debt in a lump sum together with the provision of acceptable security for the balance, and • the provision of acceptable security for the disputed debt in its entirety.

You must obtain approval from an Executive Level 2 officer in Frontline Compliance before taking any action to secure payment of a disputed debt before the dispute is finalised.

Acceptance of any of the options provided in paragraph 47 of this Practice Statement is not to be considered as entering into a 50/50 arrangement and will not automatically entitle the taxpayer to the remission of GIC. However, consideration should be given to remission whenever it is requested by the taxpayer. For further details about the remission of GIC, see PS LA 2011/12 .

Where action is taken to secure payment of a disputed debt before the dispute is finalised, you must first seek to have the debt addressed by payment or an agreement to pay the disputed debt by instalments. Securities will only be considered in lieu of payment where you determine that the taxpayer does not have the capacity to repay the debt within a reasonable period of time or the taxpayer is experiencing exceptional circumstances (see Law Administration Practice Statement PS LA 2011/14 General debt collection powers and principles).

However, given action is only taken to secure payment where the taxpayer presents as higher risk, it may also be appropriate to obtain security for part of the debt, where payment for a portion of the disputed debt is made.

In a small number of cases, based on a careful risk assessment, the level of risk associated with the case may require us to take action to recover all or part of a disputed debt. Where this happens, such action will be taken by the most appropriate means available taking into account the circumstances of the case.

Examples of the type of action we may take to recover a disputed debt include: • in the case of a corporation, issuing a statutory demand in respect of the debt • commencing proceedings in court to obtain judgment in respect of the debt • obtaining a writ or warrant of execution to enforce judgment in respect of the debt • seeking a freezing order or Mareva injunction to prevent the risk that the judgment (or prospective judgment) of the court will be wholly or partly dissatisfied, and • applying to appoint a provisional liquidator.

You must obtain approval from an Executive Level 2 officer in Frontline Compliance before taking recovery action in respect of a disputed debt.

In deciding whether to proceed with recovery action in a particular case, in addition to considering the matters outlined at paragraphs 15 to 18 of this Practice Statement, we will consider any adverse consequences to the taxpayer that may flow from recovery action being instituted prior to the finalisation of the dispute. Examples of adverse consequences include: • recovery action would leave the taxpayer with insufficient funds to progress their underlying dispute or meet legal fees in respect of those processes • in the case of an individual, the recovery action would cause the taxpayer serious hardship [12] , or • recovery action would significantly impact the taxpayer's ability to continue trading or conduct their business.

However, these considerations need to be carefully balanced against the risk factors that resulted in the case being deemed high risk and our obligation to ensure that taxpayers pay their tax-related liabilities.

Where we have already commenced recovery proceedings, it is also open to the taxpayer to seek a stay of the proceeding or a stay of execution of the judgment where the examples in paragraph 55 of this Practice Statement arise.

In some cases, an objection may be lodged after we have commenced action to recover a tax debt. In such cases, the taxpayer's objection may be accompanied by a request for us to stop recovery action while the objection is being determined.

Where such a request is made, we will consider this as a request to defer recovery action under section 255-5 of Schedule 1 to the TAA. At this point, we will undertake a risk assessment as to whether or not the recovery action should continue. In doing so, you must take into account the factors outlined at paragraphs 15 to 18 of this Practice Statement and reassess whether or not recovery action remains appropriate.

Where a risk assessment results in us determining not to proceed with recovery action, you may discontinue recovery action in favour of an administrative arrangement to address the disputed debt. This arrangement could be a 50/50 arrangement or an alternative arrangement detailed at paragraphs 45 to 51 of this Practice Statement.

Where we cannot agree to an administrative arrangement with the taxpayer, the taxpayer may seek to have the recovery proceeding or the enforcement of the judgment [13] stayed pending determination of the objection.

In cases where we make a transfer pricing or profit reallocation adjustment, the taxpayer may seek competent authority assistance under the mutual agreement procedure (MAP) article contained in Australia's double-tax agreements to attempt to have the matter resolved in consultation with the other tax jurisdiction.

Where a taxpayer initiates the MAP in respect of such an adjustment, we will treat the relevant tax debt as a disputed debt for the purposes of this Practice Statement. Where the MAP is initiated, you must follow the principles set out in this Practice Statement in managing the collection and recovery of the disputed debt.

For information about the remission of GIC which has accrued during the MAP, see Mutual agreement procedure .

In cases involving review of a small business taxation assessment decision, the taxpayer may request that the Administrative Review Tribunal (ART) make orders staying or otherwise affecting the operation or implementation of a reviewable objection decision that relates to a small business taxation assessment decision. [14] For example, the ART may order us to not sue in a court or to not issue a garnishee notice to recover a debt under review.

Where the taxpayer seeks such orders, the taxpayer must satisfy the ART that the application is not frivolous, vexatious, misconceived, lacking in substance or otherwise intended to unduly impede, prejudice or restrict the proper administration or operation of a taxation law in the context of both the particular circumstances of the decision under review and the overall taxation system. [15]

In considering the application, relevant considerations for the ART may include: • the prospects of success of the underlying application for review • the financial consequences for the applicant of the refusal of a stay • the public interest • the consequences for us in carrying out our functions • whether the application for review will be rendered null if a stay were not granted, and • any other matters the ART considers relevant. [16]