Whether you’re running a business or are just an individual trying to make ends meet, there is nothing worse than finding yourself in a situation where you have a tax debt owing to the ATO, which most likely will also be accruing a general interest charge and perhaps even a shortfall interest charge.
The Australian tax system operates under a system of self-assessment, and this applies regardless of the type of tax being assessed, whether that is GST, FBT or income tax. However even with the guidance available from tax professionals like ourselves, it is not unheard of for taxpayers to still face the prospect of being saddled with a tax debt that’s still on hand long after its due date.
This can be brought about due to cash flow difficulties or perhaps the effects of personal hardship. Each unfortunate circumstance can prevent affected taxpayers from meeting their obligations on time, ending up with them carrying the tax debt.
Missing a tax deadline will lead to the resulting outstanding debt being subject to the ATO’s general interest charge (GIC). The current rate of interest charged (for the October to December 2016 quarter) is 8.76% (compounding daily). We can seek to have such interest charges remitted in certain circumstances (more below).
Let’s be clear. The ATO takes debt collection very seriously, as there is substantial revenue at stake. A report last year from the Inspector-General of Taxation on debt collection highlighted that collectable tax debt had grown to more than $20 billion in 2013-14.
According to the report, most of this (about 60% of total collectable tax debt) relates to individuals and micro businesses. To its credit, the ATO’s stated strategic focus is to “prevent debts arising”, but where they do arise it has also vowed to “take the most effective recovery action at the most appropriate time”.
PREVENTING TAX DEBT IN THE FIRST PLACE
They say that prevention is the best cure. We can offer guidance on good record keeping and managing cash flow, as these are the keys to avoiding a tax debt.
Particularly relevant for small business owners, there are certain measures that we can help you with to prevent a tax debt from arising. Namely:
- keeping your GST and income tax payments separate from other finances
- managing your cash flow properly and predict your monthly income and expenses, and
- updating your business records frequently.
Knowing as and when a debt arises, and when it is payable, becomes key to ensuring that cash flow issues are appropriately managed. To our knowledge, the ATO is at this stage trialing digital tools and apps that can help business taxpayers in this regard, which we are keeping an eye on and will pass on more information as it comes to hand.
GETTING INTO A PAYMENT PLAN
If you have difficulty meeting your tax debts, then a payment plan can be arranged with the ATO to alleviate such difficulties.
Payment arrangements can generally be applied for online with our help, usually for individuals and sole traders with an income tax or an activity statement debt of $100,000 or less. But for greater amounts or for more complex cases, a pre-emptive telephone call is generally recommended (and in some cases necessary), to clear up what needs to be put in place. We can help with both application processes.
The ATO may take different actions depending on the taxpayer, the type of debt and amount of the debt, although it is generally accepted that the ATO has favoured leniency in granting payment arrangements to struggling taxpayers who have smaller amounts owing.
In determining whether the debt poses a recovery risk, the ATO classifies debt into six categories, or debt levels, according to the amount owing:
MANAGING A LOWER DEBT LEVEL (LESS THAN $25,000)
It is generally easier for taxpayers with lower debt levels (levels 1 to 3) to enter into a payment arrangement. If your debt falls within this range, it is more than likely that you will be able to arrange for a late payment or obtain an installment plan. We can make this call on your behalf.
Be mindful to maintain the payment plan, the following must be satisfied:
- all tax credits/refunds will be used to reduce your tax debt until it’s paid off, but won’t replace the required installment payment
- GIC will accrue until the debt is paid
- you can make additional voluntary payments or pay off the remaining debt at any time, and
- you must lodge activity statements and tax returns and pay any associated liabilities on time.
The last point is important. Even if you can’t pay the tax debt by the due date, you are still required to lodge your tax return or activity statement on time to avoid a penalty.
Timely lodgement will also show the ATO that you are aware of your obligations and doing your best to meet them. This can help if you need further ATO assistance down the track.
If you subsequently find it impossible to pay an installment, a good option will be for us to contact the ATO on your behalf when this first becomes apparent. This is an important initiative, as not only can early negotiations lead to possibly varying the payment plan, but critically, this can pre-empt the ATO simply ending the payment plan — which in the worst case scenario could mean having to pay the full amount plus interest quite soon, or facing further recovery action.
CALCULATING THE RIGHT REPAYMENT
The ATO offers a payment plan calculator to assist in providing a picture of how long it will take to pay off debt, or how much is required to be paid within a fixed period (ask us about this calculator). You should be mindful that GIC will still apply for outstanding debt, however there is a possibility that this can be remitted depending on your circumstances.
MANAGING A HIGHER DEBT LEVEL ($25,000 AND ABOVE)
If you owe $25,000 or more to the ATO, obtaining an instalment plan might be more difficult. We will need to submit a request to the ATO on your behalf, and prove that you can ultimately repay the debt, and that you have made reasonable efforts to raise the funds.
The ATO will assess the viability of the request to ensure the tax debt can be paid and ongoing commitments met. Again, GIC will accrue on the unpaid debt but can be remitted by the ATO depending on circumstances.
MANAGING A DEBT LEVEL GREATER THAN $100,000
For taxpayers with a tax debt at the highest level, it is advisable that we contact the ATO immediately to discuss the situation. The ATO will do a detailed assessment and will work with us to set up a payment plan that is manageable and suitable. You will most likely need to provide us with the following information, within an agreed timeframe, for the ATO’s assessment:
- a proposal to pay all amounts owed to the ATO in the shortest possible timeframe, while allowing all future tax obligations to be met by the due date
- details on how the debt arose
- steps taken to mitigate the debt (for example, loan applications)
- the most recent statement for each bank or financial institution account held
- the following documents for the year to date and the two preceding financial years
· detailed profit and loss statement, or statement of financial performance
· detailed balance sheet, or statement of financial position
- details of any overdraft or loan facilities, including term loans, hire purchase and leasing facilities (include the balances owing, the monthly repayment amount for each debt commitment and the limit for overdrafts)
- aged creditors listing
- aged debtors listing, and
- any other relevant information that may help the ATO assess the proposal.
WHEN THERE IS A DISPUTE OVER THE AMOUNT PAYABLE
Sometimes there may be a notice of assessment that appears incorrect and has given rise to an additional amount payable — for example, this could be the result of a mistake that you inadvertently made in a past tax return or even a mistake made by the ATO.
In such cases, with the requisite supporting documents provided, we should be able to successfully seek an amendment to the erroneous assessment.
Be mindful that there is a time limit for amending tax assessments. Specifically, two years for eligible individuals and small businesses and four years for other taxpayers, from the day that the notice of assessment is issued.
Note however that even though the tax assessment in question is in dispute, you are still expected to pay the outstanding tax amount by the due date. It may however be possible that we can seek a deferral of tax payment until the dispute has been resolved. The ATO is generally more agreeable about allowing a deferral if you have a good payment history. However, GIC will still apply.
Overdue amounts, disputed or otherwise, will incur interest, which is a shortfall interest charge (SIC) for any shortfall of tax payable, and a GIC for any interest on fees and penalties. (Also note that under certain circumstances such interest can be claimed as a deduction. Ask us if this may be applicable to you.)
MANAGING A SMALL BUSINESS TAX DEBT
If you are a small business owner and satisfy the following conditions, you may be eligible to apply for an interest-free payment arrangement for the tax debt for up to 12 months.
These conditions require that the business:
- has an annual turnover of less than $2 million
- has a recent activity statement debt of $50,000 or less, which has been outstanding for no longer than 12 months
- has a good payment and lodgment compliance history, including:
· no more than one payment plan default within the last 12 months, and
· no outstanding activity statement lodgments
- is unable to obtain finance (such as loan) through normal business channels, and
- is able to demonstrate ongoing viability.
As noted earlier, once a taxpayer has an agreement with the ATO for a payment plan, it is necessary to stick with the plan. Otherwise, the interest free period will end immediately. Interest will be remitted as long the payment plan is maintained.
Even if you have already entered into another payment plan with the ATO, you can change to this interest-free payment plan if you satisfy the eligibility criteria. The interest-free period will start from the date you enter into the new plan.
IF YOU ARE AFFECTED BY SERIOUS HARDSHIP OR NATURAL DISASTER
If paying off a tax debt would cause serious personal hardship, for example not being able to provide food and accommodation for your family due to a serious accident preventing you from working, the ATO may be able to release you from some or all of the debt.
Note however that this is only available to individual taxpayers, including people operating as sole traders and partners in partnerships. It is not available to “structures” such as companies, trusts or partnerships.
If you have been affected by a natural disaster, such as flood, bushfire or drought, remember that there is special assistance from the ATO. Where eligible, the ATO will allow more time to lodge tax returns, pay tax debts without charges, or by instalments, and waive any penalties or interest depending on your circumstances.
A CHEAPER WAY?
Note that if you have a cheaper source of financing (say a mortgage offset facility), the interest rate from accessing funds from such accounts will generally be lower than the penalty rates that the ATO applies via the general interest charge. It may be in your best interest to access those funds to settle an ATO debt.
For business taxpayers, interest incurred on funds borrowed to repay a tax debt can be deductible as a cost of doing business. Call Taxwise on 08 9248 8124 to ask us about this. However, if an individual has taken out the loan to settle a tax debt that is not related to operating a sole trader business, the ATO views such interest incurred as not being deductible on the basis that it was not incurred in the course of the taxpayer deriving their assessable income and also because it is private in nature.
© Content of this blog is in partnership with Taxpayers Australia