2015
Insolvency
Review
Australian Taxation
Office
Overarching Report
2015 Insolvency
Review – Overarching
Report
July 2015
Liability limited by a scheme approved under Professional Standards Legislation
Contents
1
Executive Summary
2
2
Background and Approach
3
2.1
Overview
3
2.2
Sample
3
2.3
Review Process and Methodology
3
2.4
Assessment Context
4
3
4
Detailed Findings
5
3.1
Review Question Outcomes
5
3.2
Review Observations
5
Limitations
7
This report is solely for the information of the Australian Taxation Office and is subject to the terms of our engagement
and the limitations set out in section 4 of this report. Its existence may not be disclosed nor its contents published in any
way without the prior written approval of PricewaterhouseCoopers. PricewaterhouseCoopers does not accept any
responsibility to any other party to whom this report may be shown or into whose hands it may come.
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1
Executive Summary

This report was prepared by PricewaterhouseCoopers (PwC) in respect of its engagement by the
Australian Taxation Office (the Tax Office) to independently review 80 insolvency cases selected
randomly by the Tax Office on a national basis.

The objective of the review was to provide an independent view as to whether the Tax Office’s
insolvency actions are in accordance with legal requirements and ATO policy, in particular the
content and direction of relevant Tax Office Practice Statement Law Administration policies (see
section 2 for more details).

The review involved an assessment against three specific questions that were determined by the
Tax Office in relation to the legal recovery actions of the Tax Office in its management of
insolvency cases.

The three insolvency case questions were answered positively in all 80 case file reviews.
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2
Background and Approach
2.1
Overview
PwC was appointed by the Tax Office to undertake an independent review of insolvency decisions to
provide an independent view as to whether the Tax Office’s insolvency actions are in accordance with legal
requirements and ATO policy, in particular the content and direction of the following Tax Office Practice
Statement Law Administration (PS LA) policies:

PA LA 2011/6 – Risk management in the enforcement of lodgement obligations and debt
collection activities

PS LA 2011/14 – General debt collection powers and principles;

PS LA 2011/16 – Insolvency – collection, recovery and enforcement issues for entities under
external administration;

PS LA 2011/18 – Enforcement measures used for the collection and recovery of tax related
liabilities and other amounts.
2.2
Sample
A sample of 80 insolvency decisions made during 2014 were selected and extracted by the Tax Office from
its debt management files. Several additional files were also selected by the Tax Office to be used in the
event that a conflict of interest was identified.
PwC was provided with the names of the selected case files prior to the commencement of the review in
order to identify any potential conflicts of interest. Where a potential conflict was identified, an alternative
case was selected.
2.3
Review Process and Methodology
All reviews were undertaken at the Tax Office’s premises at 747 Collins Street, Docklands, Melbourne,
Victoria, during May 2015.
Reviews were based on electronic (Microsoft Excel and Adobe Reader) files prepared by the Tax Office for
each case. The files comprised notes of communication and correspondence between the taxpayer and Tax
Office extracted by the Tax Office from its electronic case management systems.
Our approach to each review was as follows:

Review file notes and documentation in the files provided by the Tax Office to gain an
understanding of the case;

Understand the taxpayer’s circumstances and assess the information available to the Tax Office to
inform key decisions throughout the management of the case;

Assess the Tax Office’s actions against the three review questions, bearing in mind legal
requirements and relevant Tax Office policies; and

Complete an assessment of each file in relation to the decision made by the Tax Office.
Please refer to Section 4 of this report in relation to limitations surrounding the review.
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2.4
Assessment Context
Aside from requiring all legal provisions and timeframes to be met, the Tax Office’s PS LAs considered as
part of this review do not prescribe mandatory debt recovery actions and timeframes that must be adhered
to by Tax Office staff in the management of insolvency cases. Rather, the PS LAs provide broad principles
and a range of recovery actions that may be utilised by Tax Office staff in the management of cases, with
each case to be considered and treated on its merits in accordance with the Tax Office’s compliance model.
The range of potential recovery actions includes, but is not limited to:

Telephone or written contact with the debtor

Accepting payment of a tax debt by instalments (entering into a payment arrangement)

Accepting security

The issue of a garnishee notice

Legal action, up to and including, the liquidation of companies or the bankruptcy of an individual.
PS LA 2011/18 provides, in part, that the final legislative sanction for debtors who do not pay or enter into
payment arrangements is the sequestration of an individual’s estate in bankruptcy or the liquidation of a
corporate debtor, but that these actions will normally be used only after other recovery actions have been
taken and proven unsuccessful.
PS LA 2011/6 provides, in part, that there is no one correct answer for dealing with outstanding returns or
debts; the decision-making process entails the evaluation of objective and subject factors before reaching a
conclusion as to overall risk.
PS LA 2011/6 also provides, in part, that:

All taxpayers will be treated professionally, equitably and fairly

Taxpayers can expect each case to be considered on its merits

Taxpayers can expect the ATO to apply the most severe measures and sanctions in response to the
highest level of risk in accordance with its compliance model.
On the basis that the Tax Office PS LAs do not prescribe mandatory debt recovery actions and timeframes,
there are no measurable criteria against which PwC can objectively assess the Tax Office in answering the
three review questions. In undertaking our assessment against the three review questions, PwC has
considered a breach of the Tax Office’s policies to be action by the Tax Office which is either outside of legal
requirements or against the intent of the ATO policies, in particular the requirement for taxpayers to be
treated professionally, equitably and fairly.
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3
Detailed Findings
3.1
Review Question Outcomes
As part of our review three questions were considered for each of the 80 cases. The questions and review
outcomes are shown below.

Did the Tax Office provide the taxpayer with the opportunity to meet their obligations and discuss
alternative arrangements to avoid insolvency?
Yes: 80 cases
No: 0 cases

Were the actions of the Tax Office, in seeking payment of outstanding tax in this case, too early
and did this lead to the premature insolvency of the business that could reasonably be considered
viable based on the information provided by the taxpayer and available to the Tax Office?
Yes: 0 cases
No: 80 cases

Were there other practical options available to the Tax Office that should have been taken to avoid
the business being declared insolvent, without putting the collection of tax at unreasonable risk?
Yes: 0 cases
No: 80 cases
3.2
Review Observations
Review observations from the 80 cases reviewed are as follows:

In all 80 cases reviewed, the Tax Office issued necessary legal notices prior to the taxpayer being
wound up or made bankrupt by the Tax Office (Prior year: 80 cases).

In all 80 cases reviewed, the Tax Office made telephone contact or attempted to make telephone
contact with the taxpayer prior to commencing formal insolvency or bankruptcy proceedings
(Prior year: 78 cases).

On average, the Tax Office made or attempted telephone contact with the taxpayer at least 17
times prior to the taxpayer being made insolvent or bankrupt (Prior year: 17 times).

On average, the length of time between the Tax Office’s initial telephone contact with the taxpayer
in relation to outstanding tax debts and the final telephone correspondence prior to the taxpayer
being made insolvent or bankrupt was a period of 3.8 years (Prior year: 4.6 years).

On average, the length of time between the Tax Office’s initial telephone contact with the taxpayer
in relation to outstanding tax debts and the taxpayer being made insolvent or bankrupt was
approximately 4.5 years (Prior year: 5.6 years).

In all instances where the taxpayer provided financial information to support their viability and
ability to service the tax debt, this information was assessed by the Tax Office and if the taxpayer
was deemed viable by the Tax Office a payment arrangement was entered into (Prior year: all
cases).

On average, at least two payment arrangements were entered into and defaulted by taxpayers
prior to the taxpayer being made insolvent or bankrupt (Prior year: at least two arrangements).
Five cases were identified where the taxpayer defaulted on 10 or more payment arrangements
prior to being made insolvent or bankrupt (Prior year: six cases).
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

In 58 of the 80 cases reviewed, at least one payment arrangement was entered into with the
taxpayer prior to the taxpayer being made insolvent or bankrupt (Prior year: 56 cases). In the
remaining 22 cases, the taxpayer either:
o
put forward a payment arrangement that was deemed unsatisfactory by the Tax Office
and was therefore not accepted; or
o
the taxpayer failed to put forward a payment arrangement to the Tax Office.
In relation to additional recovery actions taken by the Tax Office prior to the taxpayer being made
insolvent or bankrupt, we note as follows:
o
From the sample of 80 cases, 44 cases were corporate insolvency cases and 36 were
individual bankruptcy cases. In relation to the insolvency cases, Director Penalty Notices
were issued in 37 of the 44 cases (Prior year: 17 of 19 cases).
o
From the sample of 80 cases, garnishee notices were issued in at least 52 of the cases
(Prior year: 47 cases). In a further 23 cases, garnishee options were investigated by the
Tax Office but no viable garnishee options were identified (Prior year: 30 cases).
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4
Limitations

PwC was advised that the Tax Office’s selection of cases for review was on a random basis from a
national list of debt management files on the Tax Office systems. PwC had no input into the
selection process. There are inherent risks in drawing conclusions from a random sample. The
sample may not be representative of the entire population.

Reviews were based on electronic (Microsoft Excel and Adobe Reader) files prepared by the Tax
Office for each case. The files comprised notes of communication and correspondence between
the taxpayer and Tax Office extracted by the Tax Office from its electronic case management
systems. PwC cannot guarantee that it has considered all necessary information and issues,
particularly if these were not included in the electronic case files that were provided. The
information provided has not been audited or verified in any way by PwC and we are unable to
provide assurance that these provide a comprehensive and accurate record of all correspondence.
Our engagement did not constitute an audit or review in accordance with Australian Auditing
Standards and accordingly no such assurance or opinion is provided in this report.

Where case notes indicated that financial information was provided by taxpayers in order to
support their viability and ability to service the tax debt, PwC did not undertake an assessment of
that information or the viability of the taxpayer. PwC reviewed whether the Tax Office assessed
the financial information and viability of the taxpayer, but PwC did not review the validity or
correctness of that assessment.

In answering the three questions, it is noted that correspondence with the taxpayer includes via
the taxpayer’s authorised tax agent or lawyer.

Please note the assessment context outlined in section 2.4. The findings and conclusions reached
in the review are subjective. It may be possible that a different finding could be drawn from a
review of the same file.
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