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Debt Recovery and Interest Remission

The Australian Taxation Office (“ATO”) has intensified its debt recovery actions in recent months with a particular focus of small businesses and self-employed individuals.

Increased Debt Recovery Action

The ATO is actively pursuing more than $34 billion in debts owed by small businesses and self-employed Australians that were deferred during the COVID pandemic.

There has been a noticeable shift towards more aggressive enforcement measures, including reporting debts to credit agencies, issuing garnishee notices, and initiating wind-up applications against businesses. These actions have contributed to a higher rate of insolvencies, especially in sectors already struggling due to economic challenges.

The ATO have indicated that they will be asking more questions in relation to an entity’s capacity to pay when granting future payment arrangements.

Remission of Interest Charges

In addition to the increased recovery action, the ATO has also become more stringent in assessing requests for remission of interest charges.

During the COVID pandemic, the circumstances for which it was reasonable to grant a remission, were loosened to assist businesses but the ATO have noted that assessment will revert to the more stringent conditions outlined in the longstanding Practice Statement (PS LA 2011/12).

When assessing GIC remission requests, the ATO considers:

  • Circumstances: What caused the delayed payment?
  • Responsibility: Was the delay within the taxpayer’s control?
  • Efforts: Steps taken to reduce the delay.

If the taxpayer was responsible for the delay, fairness and reasonableness are also evaluated.

The current General Interest Charge (“GIC”) rate is 11.34% pa so businesses are urged to get their lodgements and payments up to date to avoid incurring further costs.

There is also a proposal that will see ATO Interest Charges become non-deductible to businesses from 1 July 2025.

It is clear that the ATO now has a mandate to collect the governments money and our clients should not assume GIC remission will automatically be forthcoming.

ATO’s Scrutiny of Division 7A Obligations

The Australian Taxation Office has recently intensified its focus on requests for discretion under section 109RB, specifically related to Division 7A obligations.

Division 7A is a critical provision that prevents private companies from making tax-free distributions to shareholders or their associates through payments, non-commercial loans, or debt forgiveness.

The Role of Discretions

The ATO has specific discretions available to the Tax Commissioner when addressing breaches of Division 7A. These discretions allow for flexibility in certain situations, such as disregarding deemed dividends or extending the repayment time for loans. However, the ATO exercises these discretions judiciously, considering the circumstances and evidence provided.

Threshold for Favourable Discretion

Favourable discretion is typically granted in cases of honest mistakes or inadvertent omissions. To secure a favourable outcome, taxpayers must demonstrate that their actions were unintentional and supported by sufficient evidence.

Recent Changes TD 2022/11 which was finalised in July 2022 broadens the circumstances triggering Division 7A deemed dividends, emphasizing compliance and scrutiny.

Contact your WMS advisor with any questions or queries.