At any one time, more than two million Australians will have an outstanding tax debt, with the level of undisputed tax debt in Australia now exceeding $50 billion. The majority of tax debts are below $2,500, but a significant number are well above this. The extent of the powers the Australian Taxation Office (ATO) has to assist such a large cohort of taxpayers, many of whom are likely to be experiencing financial vulnerability, is a question of first importance.
There is rarely, if ever, a suggestion that the ATO lacks the requisite powers to collect tax debts. But, the ATO also has powers to assist taxpayers in paying their tax debts. These latter powers are not well understood.
Our examination found a mix of express legislative powers, an undefined incidental power, and other suggested powers which likely conferred no power at all. This unsatisfactory state of affairs suggests a need to redefine the ATO’s powers to assist taxpayers with their tax debts, and to make express powers which are currently incidental or non-existent.
Express powers
It should first be emphasised that the ATO has no power to waive a tax debt. Under the Public Governance, Performance and Accountability Act 2013 (PGPA Act), that power is reposed exclusively in the Minister for Finance. It is a power which is used sparingly and not used to address financial hardship.
The ATO does have an express power to defer the time at which a tax debt is due and payable, but the circumstances in which this power is exercised are narrow, and includes natural disasters and the embezzlement of a taxpayer’s payment by a tax agent. Where the power is exercised, the general interest charge (GIC), a penal rate of interest currently imposed at 10.78% per annum, only begins to accrue from the deferred payment date.
The ATO also has an express power to release a taxpayer from certain tax related liabilities if the taxpayer is an individual and “would suffer serious hardship if . . . required to satisfy the liability”. This power has existed for more than a century and currently applies to liabilities which include income tax, GIC and penalties, but not the goods and services tax (GST).
One notable aspect of this provision is the requirement that you “would suffer serious hardship if you were required to satisfy the liability”. The courts have held this to establish a causal relationship between the requirement to satisfy the tax liability and the serious hardship. The result is that the more serious the financial hardship is, the less likely it is that a release of the tax debt will be granted, because you will still suffer hardship once the tax debt is released. This is presumably to protect the ATO in the event of a subsequent bankruptcy.
Assuming serious hardship can be established, relief may still be refused on discretionary grounds. This legislative provision is more than a hundred years old and is now woefully out of date. It poses a “daunting task” for taxpayers. We analysed all 34 reported cases over a 50-year period, and found that only four were decided in favour of the taxpayer. Of these, only two resulted in a full release. For cases that are never appealed, less than one third of applications result in release.
The most common express power used by the ATO is to permit the payment of tax debts by instalments, often known as a “payment arrangement”. This does not vary the time at which the amount is due and payable, so GIC continues to accrue on the debt and often begins to exceed the original debt.
The administration of these arrangements by the ATO is opaque, with very little data made publicly available. Our request to the ATO for data on payment arrangements, which the Inspector-General of Taxation had previously recommended be published, was met with polite refusal.
The Inspector-General has rightly indicated that payment arrangements are an indicator of the health of the tax system because it shows that taxpayers experiencing difficulty are still engaged with the ATO. Yet, only about 30% of undisputed tax debts are subject to a payment arrangement. That’s a lot of taxpayers in the wilderness, including many experiencing genuine financial vulnerability. The perceived harshness of the ATO and a lack of flexibility in payment arrangements may be contributing to this.
Incidental power
The ATO has an express power to sue to recover an unpaid tax debt, which carries with it an incidental power not to pursue recovery in certain circumstances.
This little remarked upon power has important implications for debt relief. It allows the ATO to “pause” debts, give undertakings to a court in debt matters, and accept compromise proposals for undisputed tax debts, though this rarely happens in practice. This incidental power could be used to much greater effect by the ATO in providing relief.
The ATO considers that the PGPA Act gives the ATO the power not to pursue debts if uneconomical to do so. Our analysis of this Act places considerable doubt on whether it extends to the administration of taxation laws and hence to tax debts. However, the incidental power could be used to exactly the same effect.
Other suggested powers
The ATO also considers it has a general “power” derived from taxation laws which give the Commissioner “the general administration” of tax laws. A narrower, and with respect, better view is that it confers no additional power on the ATO, but acts in conjunction with the express powers. The limited judicial authority on these provisions is divided and the issue may ultimately need to be resolved in the High Court.
In our view, it may be significant that each of the actions of the ATO considered in the courts is supported by a specific power in the taxation law such that a resort to a general ‘power’ of administration is unnecessary.
Time to redefine and clarify the ATO’s powers
We consider it is now time to redefine and clarify the ATO’s powers to assist taxpayers with their tax debts. This should be done using clear and express powers where possible. Three measures in particular would help.
First, the tax law should be amended to give the ATO an express power to compromise a tax debt or not to pursue a tax debt.
Second, the PGPA Act should be amended to clarify whether the duties imposed on the ATO confer express powers in relation to the administration of tax debts.
Third, the tax laws should be amended to clarify the nature of the ATO’s duty to administer the tax law with respect to tax debts and, if it confers a power, to clarify the limits of that power.
With undisputed tax debts over $50 billion affecting so many Australians, it is of critical importance to the ATO and taxpayers alike to have clearly defined powers to assist those taxpayers who are genuinely struggling to meet their obligations.
Disclosure
The UNSW Tax Clinic receives funding from the Federal Government’s National Tax Clinic Program.
Further reading
O’Rourke K, Kayis-Kumar A and Walpole M, ‘Serious Hardship Relief: In Need of a Serious Rethink?’ (2021) 43(1) Sydney Law Review 1-42.
O’Rourke K, Kayis-Kumar A and Walpole M, ‘Redefining ATO powers at the intersection of debt and vulnerability’ (2025) 54 AT Rev 94.
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