By Georgina Wilkins/ Fairfax Syndication

The Australian Taxation Office says it will take "more timely action" to prevent small business debts escalating.

The ATO is being urged to take legal recovery action earlier to prevent small to medium companies trading while insolvent.

The ATO says it is focused on taking "more timely action" to prevent corporate tax debts escalating and potentially impacting other creditors.

Debt owed to the ATO has risen to almost $20 billion, with small-business taxpayers accounting for 60 per cent of the money owed.

The ATO had previously allowed companies to accumulate more than $345,000 in back taxes before taking legal action.

An ATO spokesman said the agency was rethinking its approach. "The community has told us they want firmer treatment of tax debtors who do not address their debt," a spokesman said.

"Businesses that ignore their obligations will receive timely, firmer action from the ATO. This will include legal action where there is evidence the business is insolvent."

But Donna Smith, managing director of debt collection agency Reliance Recoveries, said the Tax Office was still too lax when it came to calling in debts from larger small to medium-sized enterprises (SMEs).

She said in one instance, a company was allowed to merge with another business despite owing more than $700,000 in back taxes. This was after being put on nine different payment plans by the ATO and being issued with a legal proceeding that was never followed through.

The company was later discovered to be insolvent but not until after it merged, she said, leading to twenty job losses.

"The very first thing companies do when they're struggling is they stop paying tax and stop paying super," she said. "As far as I'm concerned, as soon as that happens they are trading while insolvent."

Ms Smith said the ATO's failure to act sooner showed a bias in favour of larger enterprises over individuals and small businesses.

"They hammer people in small businesses, the guys that are low rung, people that are generally going to do the right thing," she said.

"I see a lot of these high-end debtors get away with things like nine payment arrangements. It shouldn't be this way."

In March, Tax Commissioner Chris Jordan said the ATO had reset its debt and payments strategy to take legal recovery action earlier for companies that did not respond to the agent's demands.

"We found that we were waiting far too long before initiating bankruptcy or wind-up action," he said.

"Taking earlier legal action is having the right impact – people are changing their behaviour and paying up earlier, and importantly, we are not letting those who are insolvent and unviable to continue to operate and get an unfair financial advantage."

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