Taxing the Tax Office: ATO debt recovery to grow costlier under federal outsourcing levy

Commercial recovery agents make millions a year chasing up debts on behalf of the ATO, but a new federal levy might make those engagements less economically viable.

Earlier this month, Finance Minister Katy Gallagher announced an “external labour levy,” expected to generate $375 million in savings over four years from 2024–2025.

The levy will ramp up the government’s efforts to bring public services back in-house, a cost-cutting exercise Minister Gallagher said is getting increasingly difficult.

In the 2022–2023 October budget, the government saved $3 billion by reducing its reliance on consultants, contractors, and labour hire. In Tuesday’s budget, the government hopes to find another $1 billion in savings that way.

An ATO spokesperson said the outsourced debt recovery activities only compliment the ATO's larger inhouse debt collection activities.

"They bring specialised skills to debt collection that support our overall debt work. We do not use them for any firmer or stronger debt recovery actions," they said.

"The ATO engages external providers for a range of services where it represents value for money and delivers the best outcome. They are used to supplement the internal APS workforce where specific technical skills are not readily available internally or a surge workforce is required."

"The ATO is committed to the principles of the APS Strategic Commissioning Framework and is in the planning stages for its implementation. We are considering how we implement the government’s announcements including this savings measure."

AusTender, the government procurement database, shows that the ATO has engaged Serco Global Services in an ongoing contract for the provision of outsource labour services worth $448,984,076.72.

An ATO spokesperson said that only a "small percentage" of the contract relates to debt collection while the vast majorty relates to "telephony and processing in our taxpayer services."

The contract has been in place since 2017 and is set to expire in June 2024. According to The Mandarin, another ATO contract with a debt recovery supplier worth $11.5 million is set to expire next month.

Last month, Tax Commissioner Rob Heferen warned the ATO’s debt recovery grace period during the COVID-19 pandemic was over.

Of the $50 billion in unpaid collectable debt from individual taxpayers and businesses, the majority was owed by small businesses.

According to its most recent annual report, the Tax Office’s collectable debt nearly doubled in the four years leading to 2021, topping $50.2 billion last June.

While chipping away at its growing creditor list is a priority for the freshly minted tax commissioner, more of this work might have to be carried out internally.

The Mandarin confirmed the ATO’s external debt recovery engagements would be subjected to the federal levy.

The levy is part of an effort to rebuild the APS following controversies such as the PwC tax leaks scandal – in which confidential government information was misused by a private consultant – and concern over the government's dependence and spending on external engagements.

The big four consulting firms have been at the heart of this drive, following revelations that their contracts had quadrupled in value over the decade leading to last year.

According to the Centre for Public Integrity, taxpayers had funded $1.4 billion in big four contracts the year before last, while public spending on big four management advisory services had increased by 1,270 per cent in the decade leading.

The network of external providers to the government has been referred to as the “shadow APS,” free from the same level of scrutiny expected of the government or, in the case of big four firms, corporations.

A recent Treasury consultation paper took aim at the patchwork regulatory frameworks affecting partnerships, under which they are largely expected to craft their own accountability mechanisms.

“It is not clear whether internally set accountability mechanisms are sufficiently robust to adequately safeguard the interests of both partners and non-partner stakeholders, such as audit clients and shareholders of these clients,” wrote Treasury.

“The control and management of partnerships is shared among the partners, who are also its owners. This means that in a traditional partnership structure, the interests of ownership and management are aligned,” it added.

From 1 July, all federal government departments will be required to publish targets on bringing a certain share of their core work in-house.

Agencies will be expected to prioritise engagements with small businesses, First Nations businesses, and specialist providers where possible.