So how did the ATO lose track of $165m?
As a blogger, this is not a story you can go past.
Last week, we learned the ATO (Australian Tax Office) was short paid by $165m for something called PAYG. What does that mean? Pay As You Go, it’s tax withheld from an employee’s salary and paid to the ATO.
It’s one of the biggest cases of fraud in Australia in our time. The fallout will be huge.
The ATO will need to write off a chunk of $165m. Ouch!! Given it’s 0.05% of what they collect in taxes, it’s not going to break them.
For a business, a bad debt writeoff can do major damage and, if it’s big enough, cripple a business.
So what did the ATO do (or not do) to allow the debt to grow to this size and what can business owners learn from this?
What created the loophole?
For companies with contractors, they have a decision to make. Are their contractors genuine business owners, or deemed employees?
This does get very messy and the law is on the side of the contractor, rather than the employer. The finer points of this distinction is an article for another day.
Where it’s not clear, some companies reduce their risk by having a labour services company pay their contractors. A company called Platus Payroll was setup to do exactly that.
This company then employs their contractors on their client’s behalf. They pay the superannuation and tax withheld to the ATO.
The lack of clarity here does create a market demand for a company like Platus Payroll. 7 people responded to that demand to create this scheme.
In some cultures that’s called being entrepreneurial. It turns out the way they did it is allegedly criminal (it hasn’t gone to trial yet).
What was the scam?
Platus Payroll set up subsidiary companies who employed the contractors. For this example, we’ll call the subsidiary company Platus A Pty Ltd.
Let’s say a client paid the subsidiary company $109,500 for one month’s payroll. This is salary of $100,000 + super of $9,500.
The salary before tax is $100,000, let’s say the salary after tax was $65,000.
Platus A Pty Ltd paid the staff $65,000 and $9,500 into their superannuation funds.
They owed $35,000 to the ATO. The current premise is that part of it was paid to the ATO and part was withheld by the 7 suspects.
So how did they hide it?
A BAS (business activity statement) or an IAS (Interim Activity Statement) is filed monthly. This includes gross pay and tax withheld.
When this is lodged, this creates a debt with the ATO that needs to be paid.
At the end of the year, the total BAS’s and IAS’s are added up and reconciled to annual salaries and tax withheld. This is reported to the ATO. Employees then file these with their own tax return. Their tax return is matched against the reconciliation.
Hence there are lots of checks and balances to stop short reporting of taxes.
While we don’t know all the detail yet, one explanation is they lodged the IAS for $35,000 and paid a lower amount. This would avoid those checks and balances. That means somewhere in the ATO is a register of unpaid bills adding to $165m.
That register of unpaid bills can turn into bad debts if it’s not actively managed.
So how did that get missed?
A few things.
Lots of subsidiary companies were setup (our example was Platus A Pty Ltd) to keep the debt level down for each company.
They would not be called names like Platus A Pty Ltd. They would have had names that could not have been easily linked.
Hence if you look at the outstanding debt register it’s not obvious the debts are linked. This register is known as an accounts receivable ledger.
That ledger is normally sorted by name. Create companies that are well scattered through the alphabet and no one is going to make the connection.
The second thing was the use of “straw” directors for the subsidiary companies. None of the 7 suspects would have been company directors. The ATO can (and does) go after company directors personally for unpaid PAYG. The “straw” directors were people that had no personal assets to go after.
The method by which the company went into insolvency to remove the outstanding debt to the ATO demonstrates an indepth understanding of the insolvency laws (also very grey).
For all of this to work, someone also had to have intimate knowledge of the inner workings of ATO debt collection processes. I’ll let you draw your own conclusions there.
What can business owners learn from this in managing their accounts receivable.
Do you know what your accounts receivable even is? Can you access this information easily?
Do you track it regularly?
Is it someone’s job to follow up on unpaid amounts once they go past due?
Are you contacting them by phone, or by email? If it’s email only, those can be ignored. This is where old fashioned phone calls make the most difference, people are savvy to the fact machines send most of the emails.
When they do follow up, what happens if they can’t get hold of the customer?
Does the customer have an address for mail that’s not a PO Box. Can you visit that address?
Is there a recurring pattern across several customers in the same industry and are they linked? If your gut instinct is telling you there’s a problem, chances are there is.
If you’ve had a bad debt in the past, do you know who the directors were? Have you updated your CRM to make sure that person is flagged as someone you don’t want to do business with in future?
Best practice is all about constant follow up, constant communication and persistence.
It’s also about skillsets. Often it’s finance people (bookkeepers) who follow up on unpaid accounts as it’s a finance issue. Remember you’re asking for money, this is part of your sales cycle. How do you want your customers communicated with?
In the fallout from this investigation, there will be many recommendations where best practice wasn’t followed.
For those inside the ATO, that’s never a fun experience. For you as a business owner, this does present a unique learning opportunity!