Chartered accountant GAIL FREEMAN reveals that the ATO is reinstating written-off debts that were originally “uneconomical to pursue” and there’s no escaping them.

Recently the ATO issued a large number of payment requests for debts that had previously been written off as “uneconomical to pursue”.

Maybe you had a debt in this category. Like most people you probably thought that the debt was written off. 

During covid, many debts were treated in this manner. I understand that taxpayers were also advised that they may be written back later.

However many of these reactivated debts were much older. We got a list of 20 debts that had been written off as “uneconomical to pursue” with a letter stating that they would not be followed up at this time, but if there was a credit balance, the debt would be recovered from this balance. Some of the debts were very small, for example 33 cents and 55 cents. The largest was $1000 for a deceased client.

We did not appear to have been advised that there was a debt that was “uneconomical to pursue” for most of these clients. Most of these debts were raised around 2008 and written off in 2010. That is the time when the ATO started to use computers and keep accountants in the loop. 

The former tax commissioner has since said debts raised from before 2017 are now on hold. There is no indication of what will happen to those “debts” in the future.

You could be excused for thinking that when a debt is written off as “uneconomical to pursue” that it means that it’s been written off. Unfortunately, this is not the case. If you have a debt that is raised under state law, the statute of limitations applies. That means that after a certain time, the debt cannot be reactivated. However, the ATO is governed by federal law and no such limitation applies. 

Accordingly, the ATO can reactivate a debt from any year that it deems appropriate and you are legally obliged to pay it.

The other difficulty with these debts written off as “uneconomical to pursue” is that they still incur interest at the relevant rate. For example, the debt may be quite small but the interest can be quite large. So an $8000 debt can become a $38,000 debt! 

If your debt has been reinstated make sure that the interest and the debt have been correctly calculated. For example, one of the debts on our list was not a debt at all, it was a penalty that had been written off incorrectly. We have since been able to get it processed correctly. 

We now have a new Commissioner of Taxation who has indicated that the ATO will be going hard on debt collection. At the same time, the Commonwealth Ombudsman, the Inspector General of Taxation and Tax Ombudsman have issued a joint statement recommending that the ATO should process debts in a transparent and humane manner. 

If you have a tax debt do not bury your head in the sand, contact a tax adviser to get the matter resolved. If you receive a letter headed up directors’ penalty notice you need to respond as quickly as you can before any legal action is instigated against you.

We have been able to get penalties and interest removed so the amount owed is considerably less than the original notice suggested. Just receiving a notice with a large number on it does not mean that you actually owe that amount. 

Clearly, the ATO has to recover debts but they have to recover debts that are correct and your rights have been complied with in accordance with the Taxpayer’s Charter and that your treatment by the ATO has been fair and reasonable.

If you have received an ATO debt notice for a debt that has been written back or any other form of debt contact the expert team at Gail Freeman & Co-Pty Ltd on 6295 2844, email info@gailfreeman.com.au or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.