The ATO is reviving old tax debts, threatening some with bankruptcy

After escaping an abusive partner more than a decade ago, Adriana Carrington felt life was just getting back on track.

She had worked through years of therapy, finally got a mortgage for a new home and started her own business.

But she says the tax office has now derailed her life by hitting her with an alleged tax debt dating back to the 2008-09 financial year – a debt she never knew existed.

“I’m devastated, absolutely devastated; inconsolable,” Ms Carrington tells ABC News.

“After so many years, it makes it so hard, because you’ve got to go back through historical documents that you do not have … it’s an absolutely terrible thing.”

The ATO sent thousands of Australians notices late last year alerting them, or their tax agents, that they have historical tax debts, causing many people like Ms Carrington confusion and distress.

Ms Carrington had to investigate how the debt came about, and after some research learnt that all those years ago, her ex-husband was placing income into a trust under her name.

She says while she did not physically receive income from that trust account, its existence created a debt under her name.

Complicating all this is the fact that she didn’t become aware of the debt until it had gone from being ‘invisible’ to visible on her myGov account.

In 2015, the ATO deemed the 2008 debt – which at the time was about $15,000 – as “uneconomical to pursue”.

And in 2016, her accountant told her this debt had been effectively written off and she didn’t need to worry about it.

While the debt still theoretically exists, typically the ATO doesn’t pursue debts that are deemed “uneconomical to pursue” because it’s more costly for the agency to chase them down than to write them off.

But, last year, the ATO resurrected Ms Carrington’s debt, along with alleged debts belonging to thousands of other Australians.

The fact that it was “uneconomical to pursue” and then reinstated, now appears as a one line reference on her myGov account.

These debts had effectively disappeared and then reappeared many years later, along with hefty interest charges.

The ATO has said it was owed more than $15 billion from 1.8 million entities, largely consisting of individuals, but that this figure could be higher once interest is applied to those debts.

It did not say how much higher, but Ms Carrington has so far been hit with interest charges amounting to double the value of the original debt, and the claimed debt is now $34,000 and still growing.

‘Whiff of Robodebt’

Some have likened the situation to the controversial Centrelink Robodebt scheme that chased welfare recipients for money the agency claimed they owed but was later found by a royal commission into the scheme to be seriously flawed.

Although, in many of the Robodebt cases, the welfare recipients targeted had not actually been overpaid, and never owed the government any money at all.

Ms Carrington calls it “Robotax”.

“It’s been really hard — mentally, really hard,” she says.

The ATO has rejected Ms Carrington’s requests to waive the debt, which she says could financially cripple her and cause her to lose her home. She wants the federal government to intervene. 

“I’m already 55 years old – I’ve only got a certain amount of working time left and I have no superannuation that I can draw on,” she says.

“When I left my husband [in 2012], I had a three-page bad credit list. I couldn’t get a home into my own name. I have fought and worked and saved for all these years to finally be able to put a home in my name after having my [previous] house repossessed from the bank.

“That’s a huge thing for me. Now the tax office wants to take my family home.”

Independent MP Andrew Wilkie also says the federal government should consider waiving debts in some cases where the debts are too small, too old, and not the fault of the taxpayer.

“There’s more than a whiff of Robodebt,” Mr Wilkie says.

“Surely there’s a point where something is totally lost in history, particularly if it’s a small amount of money.

“The ATO should consider waiving a debt in extreme circumstances … when these debts have been almost lost in history, when they haven’t appeared in [peoples] online accounts, and taxpayers have lost visibility of these debts, they shouldn’t then just out of the blue get a threatening letter saying that the money will be taken out of their next tax return.”

Some tax advisers are also frustrated with the ATO and are calling on the government to intervene.

Gail Freeman runs a small accounting firm in Canberra and represents taxpayers who are being pursued for old debts worth as little as a few cents and one who is now deceased.

She says the law needs to be changed to waive these old debts, and that the ATO needs to better communicate with taxpayers when debts arise.

Ms Freeman received notice in October last year of the tiny amounts the ATO now wants to recoup individually from 20 of her clients.

“There were a couple of five cents, a couple of 55 cents, one at 33 cents, and the biggest one was just over $1000,” she says.

“And they were all really, really old. Most of them were from 2010 or earlier.

She says the client with the biggest debt, of just over $1000, is no longer alive.

“It’s really difficult when people are deceased going back to their heirs and successors and saying, ‘Well, there’s a debt that you didn’t know about, which the tax office are trying to recover.'”

Ms Freeman says while the amounts are small in the case of her clients, it is still “a very distressing situation”, and she’s had to hold off telling some of them as she tries to negotiate with the ATO and resolve the issue on their behalf.

“People are hurting, businesses are struggling … and to suddenly say, ‘Hey, mate, you’ve got a debt from 14 years ago, which the ATO wants to recover’, is just adding insult to injury,” she says.

“Fourteen years ago, if you’d asked them for $542, it may not have been an issue. Now, if they’ve retired and they’re living on limited pensions, it can make a huge difference.

“It’s just not a good look and it’s not nice.”

Government urged to change the law 

Ms Freeman hopes the federal government will step in and change the law so that the ATO can waive these small debts. And she’s calling on the ATO to improve its communication with taxpayers to avoid the situation ever repeating.

She says the next time the ATO decides to write something off as ‘uneconomic to pursue’, people need to know there’s a possibility that debt could be resurrected if not paid.

“Be transparent, be timely, let people know what you’re doing,” she advises.

Associate Professor Ann Kayis-Kumar is the founding director of UNSW’s Tax and Business Advisory Clinic, which provides free tax and business advice for people in financial distress.

She says they have had about 10 clients approach them about this issue and they’ve had to work with the ATO to clear taxpayer debts. One client’s debt had $29,000 worth of interest and penalties levied over more than a decade taking the total debt to $37,000.

“It can be very distressing for clients who’ve had long-term on-hold debts,” she says.

“The sense of anxiety and fear and helplessness is quite profound.

“When it comes to economic stability, particularly in the post-COVID cost of living crisis, it can have a tipping point on a client.”

She says, for those taxpayers in hardship that cannot get an outcome internally with the ATO, there needs to be a law change and that’s up to the federal government.

While laws exist in other countries, such as the United States, that ensure people in serious hardship can have their debts waived, Dr Kayis-Kumar says Australia’s laws are outdated.

“In circumstances where that taxpayer will never be able to pay that debt off it really does represent a legitimate question of whether the best approach is to genuinely release that debt,” she adds.

ATO is still charging interest on debts dating back years

The ATO’s outgoing commissioner, Chris Jordan, said in a recent speech at the National Press Club the agency had not handled its communications with taxpayers well.

But he also made clear the agency had been told it has no discretion under the law to waive these amounts and that it’s now a matter for the federal government to decide whether to waive certain debts.

Rather than apply penalties, the ATO is trying to recover many of the debts by waiting for the taxpayer to get a credit in their tax return and then offsetting any debt against that credit.

The ATO says about 69,000 taxpayers with debts totalling $274 million fall into this category.

The problem for other taxpayers is that, until the debt is paid, interest generally still applies, and in some cases, penalties may too. 

The ATO has indicated to ABC News its willingness to waive interest charges on certain debts. 

A spokeswoman said that the agency is reviewing whether there’s a case to stop pursuing taxpayers with debts pre-2017, but “no decision has yet been made regarding the outcome of this review”.

The spokeswoman said taxpayers can apply to the ATO to seek waiving of general interest charges applied on debts, but that the ATO would only “consider these requests on a case-by-case basis”.

“The ATO also understands that in making these debts invisible to clients once they were placed on hold, it does come as a surprise to many that they have amounts outstanding, and improvements to the visibility of these debts via our online services are in progress,” the spokeswoman added.

The agency called on taxpayers impacted to reach out to the ATO to discuss payment plans or other options for those facing financial hardship.

“It was never our intention to cause frustration or concern,” the ATO spokeswoman said.

“It’s important to us that taxpayers have trust in our tax system and our records.”

A spokeswoman for Assistant Treasurer Stephen Jones said the minister was looking into the issue and “the government is deeply concerned about the way this was communicated and the stress caused to those who received the letters”.

He said the ATO was reviewing its approach with taxpayers and the government would wait for the agency’s findings “before we commit to any action”.  

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