Now comes the (tax) bill

Later this year the Australian Taxation Office will get a new boss, with Commissioner Michael D’Ascenzo set to depart after a six years in the top job and a staggering 35 years at the ATO.

There is much speculation about his replacement. Will they come from within the ATO, as has been traditional? Or will the ATO break with tradition and appoint an outsider, albeit probably one from within the public service?

Whoever Treasurer Wayne Swan settles on, one of his first tasks will be to have a quiet word in the ear of the new Commissioner and whisper: “Bring in those debts”.

The ATO’s annual report released yesterday showed unpaid tax debts jumped by $2.5 billion to $16.6 billion at the end of 2011-12.

That’s exactly 16 times the size of the 2012-13 budget surplus Wayne Swan is predicting.

It’s a big jump which says three things to me.

Firstly, conditions remain patchy out there in the SME community and there are clearly a big number of businesses struggling to manage their tax obligations.

Secondly, the ATO has actually remained pretty generous – as D’Ascenzo has consistently promised he would be – with companies that have had problems paying their bills. There are 285,000 payment arrangements out there at the moment.

And thirdly, the big jump says that the Treasurer will be very keen to improve the rate of tax collections to plug the various holes in his budget surplus.

While the ATO doesn’t break down exactly who is responsible for those $16.6 billion in debts, it’s widely accepted that the bulk of it belongs to SMEs.

This was highlighted in the Federal Government’s recent budget update, where it was announced that the ATO would get another $390 million in funding to help it chase $1.6 billion in unpaid debts over the next four years.

This isn’t a one-off give-cash-to-collect-cash initiative by the government.

In the May budget, the ATO received $195 million to help bring in $986 million from GST compliance.

The ATO also got another $106 million to manage outstanding tax debts, an initiative expected to raise $1.125 billion over the next four years.

So that’s $691 million in new funding the ATO has received since May to raise some $3.7 billion – and most of it will come from the SME sector.

Now, I can understand why the government wants to go after these tax debts as a budget-plugging quick win.

And I can understand why the ATO would want to reverse what some might see as a poor collection rate.

But the ATO and its new Commissioner need to be very careful about wading into the SME community and chasing big wads of cash.

SMEs are in a fragile state and the ATO does not want to make unpaid tax debts into unrecoverable tax debts.

James Thomson is a former editor of BRW’s Rich 200 and the publisher of SmartCompany and LeadingCompany.