Debt recovery action initiated by the Australian Taxation Office against small firms is having a "crippling" impact on many of them, according to the small business ombudsman.

Key points: The ombudsman looked at 159 complaints brought to its attention

The ombudsman looked at 159 complaints brought to its attention Ombudsman Kate Carnell has called for the ATO to immediately cease debt recovery action against any small business with a dispute before the AAT

Ombudsman Kate Carnell has called for the ATO to immediately cease debt recovery action against any small business with a dispute before the AAT The ATO said it acts only in exceptional circumstances with evidence of phoenixing, fraud, criminality or serious tax evasion

A report released today from the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) looks at the ATO's use of various debt recovery actions, concluding not only is it destroying small businesses, but is happening without proper oversight.

The ombudsman's investigation followed a recent joint Fairfax (now Nine)-Four Corners investigation into the ATO, which heard from small businesses and whistleblower Richard Boyle who detailed some of the ATO's heavy-handed use of its powers against small businesses.

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This includes garnishee notices, which allow the ATO to demand money from taxpayer's bank account, or another third party.

The ASBFEO looked at 159 complaints brought to its attention directly after the media investigation, and found that ATO debt recovery action happens in at least 12 per cent of cases that are before the Administrative Appeals Tribunal (AAT).

"Such action can severely impact a business' ability to prosecute its case and carry on its business," the report said.

It cited numerous examples where heavy-handed debt recovery action was taken. In one case the ATO had issued a garnishee notice to an electrical contracting company's seven major clients.

The garnishee notice required the clients to withhold and remit to the ATO 50 per cent of any progress claims payable to the company. It enabled the clients to terminate the contracts meaning that the company had no choice but to cease operations and collapse into liquidation, resulting in the termination of 90 employees.

Call to cease debt recovery action for AAT cases

Ombudsman Kate Carnell has called for the ATO to immediately cease debt recovery action against any small business with a dispute before the AAT.

She said it was important that actions taken by the ATO "are fair and are seen to be fair".

A recent review of garnishee notices by the Inspector-General of Taxation said it did not find evidence of a cash grab — one of the allegations aired in the joint Fairfax-Four Corner investigation — but that the ATO did not always use its powers "proportionately and appropriately".

"Immediate action to improve ATO approaches is critical since heavy-handed enforcement actions, such as a garnishee notice, effectively freezes a small business' bank accounts and can regularly mean the end of that business," Ms Carnell said.

Ms Carnell also noted that "despite the devastating impact on small businesses, the ATO alone has the authority to produce garnishee notices without any external oversight".

"ATO garnishee notices must be actioned only with appropriate oversight and approval, such as the court system, before an order can be issued," she recommended.

"The asymmetry in power between this large and powerful organisation and the small business sector has left these particular small businesses in a vulnerable position and with diminished access to justice. They simply don't have the same resources to fight where there is a legitimate dispute."

While the ATO maintains that debt recovery action is rare for disputed debts once they are before the AAT, the agency still reported that in 2017-18, this occurred in 17 out of 143 AAT matters. It said "each of these cases met the exceptional circumstances test or included significant undisputed debt amounts".

The ASBFEO's initial research was limited to historical AAT cases, mostly over the past year, but it said "the same stronger forms of ATO debt recovery actions are applied well before any AAT appeal has commenced, thereby impacting small businesses to a far greater degree".

ATO says it only acts in extreme cases

In its written response to the ombudsman the ATO said, of Australia's 3.8 million small businesses in 2017-18, it undertook about 130,000 reviews, which included about 121,000 audits and 9,000 default assessments.

The ATO's website states it received 7,792 small business objections in 2018-2019. But in its reply to the ombudsman it said there were 4,200 objections, of which 2,650 were allowed in part or full, and that there were 143 small businesses lodging appeals with the AAT in that year.

"For the vast majority of small businesses who have a disputed debt, we will not enforce recovery of a tax debt, including even parts of the debt which are not in dispute," the ATO said.

"The only time we will recover debts in dispute is in exceptional circumstances where we see evidence of phoenixing, fraud, criminality, serious tax evasion, dissipation of assets or transfer of funds to defeat the collection of tax. These are very rare cases."

But the report called for clearer accountability and transparency. It found there were often confidential deeds of settlement, which are sometimes entered into between a taxpayer and the ATO, while the dispute is before the AAT.

These should be instead made public, published by the AAT, and included in the small business statistics of the ATO, the report suggested.

It also suggested that, before stronger form of debt recovery action is undertaken, the ATO offer its in-house facilitation process for small business taxpayers. It said currently this was "not consistently offered in all cases". There were 173 small business matters settled in 2018 through in-house facilitation.

The report also suggested that the ATO expand its current pilot to allow an independent review process for small businesses.

The 12-month pilot was announced by the ATO after the joint Fairfax-Four Corners investigation, in July 2018, to offer an independent review service to eligible small businesses disputing income tax audits.

Tax boss says agency has duty to chase growing debt

After the release of the report Tax Commissioner Chris Jordan issued a statement saying the ATO would consider the Ombudsman's recommendations.

He said the numbers of debt recovery cases the ATO pursued was low, and the agency had an obligation to chase growing small business tax debts.

"The fact is that collectively, small businesses owe $15 billion in tax debt, which accounts for almost two thirds of all debts owed," he said.

"This is growing year-on-year and we have a legislative responsibility to collect tax debt."

He said in 2017-18, of 108 small business cases that went to the AAT almost $5 million was owed by the four taxpayers who were the subject of a garnishee while before the AAT, and that these cases were "highly unusual".

This included one taxpayer who alone owed almost $2.5 million in tax debt. "In this case we successfully garnisheed approximately $181,000 from the proceeds of a property sale," Mr Jordan said.

Another case involved a tax agent with a "chequered history of fraud and evasion, on top of non-compliance, overdue lodgments and undisputed debt of over $100,000", he said.

"The tax agent was believed to have gambled away over $300,000, refused to return our calls and letters, and failed to provide evidence," Mr Jordan said. "It is clear given these circumstances why garnishee action was appropriate."

Another one of the cases was referred to the ATO by Australian Customs and Border Protections Services. Mr Jordan said it involved evidence of engagement in criminal activity by the taxpayer.

"During the appeal process the taxpayer started hiding assets which led us to issue a garnishee," he said.