KEY POINTS:
- The ATO has reactivated up to 290,000 debts, which could wipe away entire tax returns.
- The practice had been put on hold because of COVID-19 and the Black Summer bushfires.
- The ATO says it has 'limited discretion' not to automatically recoup debts.
Nearly 300,000 Australians could have smaller tax returns than they thought, and some will be wiped entirely, after the Australian Taxation Office (ATO) reactivated debts it had placed on hold.
The move comes at the same time separate changes reduced tax returns for thousands of lower and middle-income earners, and with Australian households battling a cost of living crisis for more than a year.
The ATO can recoup debts owed by automatically reducing a person's tax refund and insists it has "very limited discretion" not to do so.
Historic debts were put on hold as Australia struggled through the 2020 Black Summer bushfires and the COVID-19 pandemic. But they were quietly revived in mid-2022, and many Australians have only been alerted at tax time or by navigating deep into the MyGov website.
The ATO said the move could impact up to 290,000 Australians. Source: AAP / Lukas Coch
An ATO spokesperson confirmed the move, which is legal, could impact up to 290,000 Australians this financial year. The ATO expects more than 69,000 clients will repay their 'on hold' debts, at an estimated value of $274 million. Even if it's believed a person is unaware of the debt, they said there is no guarantee they will be notified ahead of time.
"If we suspect a client may not be aware they have a debt on hold, we may try to contact prior to offsetting," they said.
"As some time may have passed since these debts were put on hold, some taxpayers may not remember they have a debt, and it may come as a surprise if a refund they were expecting is retained by the ATO to offset a debt on hold.
"The ATO has written directly to taxpayers or their registered tax agents notifying them of their debt on hold, and to remind them that the ATO has recommenced offsetting any credits and refunds against their debts on hold."
ATO officers are legally required to pursue debts unless doing so is deemed "uneconomical". The combined value of "uneconomical" debts was estimated at $1.2 billion in 2021/22, and an ATO spokesperson said that figure had remained "relatively consistent".
A latent debt could mean a person's tax refund is reduced to zero, but the ATO insisted it could not push it into negative territory, meaning the person would be forced to pay money.
Calls for ATO to improve its communication and transparency
Phil McCann, director of McCann Financial Group, stressed the tax office was doing an “agnostic job” by simply implementing government policy, and said the ATO had been flexible in helping Australians through COVID-19.
But with some debts suddenly being revived after five years, McCann said it was unreasonable that people had been blindsided by “imperfect” communication.
“Communications and transparency are the two things needed here,” he said.
“Some would say it's a poorly timed reawakening, and perhaps the punches could have been telegraphed more loudly.”
That should include a notice period of a few months, McCann said.
“Especially in small business, but mums and dads or individual taxpayers as well, it's a cash flow juggling act [at the moment],” he said.
“A small business might want to purchase a large piece of equipment and be expecting a GST refund … That will be possibly taken away with this process.
“So yes, it will affect Australians, it will affect family budgets.”
Elinor Kasapidis, head of policy and advocacy at accounting organisation CPA Australia, stressed the ATO was legally required to recoup debts, and said it was important it didn't simply ignore billions of owed dollars accrued over years.
"[But it] should explain why it isn't visible. It is a poor user experience to have to go into something and look for it," she said.
"Going forward, we would expect these things to be a lot more transparent."
Kasapidis said many Australians were not "tax literate", and urged them to seek the advice of a registered tax professional.
"Getting that communication and cut through can be hard," she said.
"What is important is to stay on top of your tax affairs, know what tax is being withheld, what deductions you can claim, and what records you need to keep. But also keep an eye on the debt side of things as well."
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