Contrary to what many people think, the ATO actually wants to help you get back on track, pay what you owe and then ensure that you comply with your obligations in the future. Experience shows that if you handle the situation in the right way and have the capacity to actually pay the debt owed, ATO officers are generally helpful and understanding and will try to assist you.
Apart from the fact that you should pay what you owe, the ATO does not want a taxpayer who is not meeting obligations to have an unfair commercial advantage over another taxpayer doing the right thing and paying what is required. This is a fundamental rule the ATO adheres to.
1. Find Out How Much You Owe
It sounds basic but too often taxpayers are unaware of total debt. ATO debt may include income tax, GST, PAYGW, Superannuation Guarantee Charge PLUS interest and penalties accumulated. With a large debt, interest and penalties mount quickly.
Superannuation is problematic because unlike other ATO debt visible in portals, Superannuation Guarantee Charge is generally unknown until audit, although accounting systems should show amounts owed.
Determine maximum upfront payment and ongoing affordable monthly payments. ATO wants debts paid as quickly as possible but may allow two years in some situations.
2. Discuss With Your Accountant/Tax Agent
It is strongly recommended you seek assistance from your accountant or trusted advisor as negotiating alone can be difficult. Naturally ATO officers take a different attitude when liaising with tax professionals.
Ensure your accountant understands that “the impossible takes longer”. Too often accountants suggest bankruptcy or liquidation is the only option when problems can often be resolved with perseverance. Such defeatist attitudes are unacceptable. Solutions have been found in the worst situations simply by refusing to accept there is no way out.
In most cases a good accountant receives more understanding from the ATO than a solicitor, as legal involvement implies a confrontational approach. However, outcomes depend on the negotiator’s experience and attitude. There are good and bad advisors in both professions.
3. Ensure Your Accountant Contacts The ATO
If you owe substantial sums, your accountant has a responsibility to be aware of the situation and ensure you are dealing with it appropriately.
Best practice dictates ATO correspondence goes via your accountant. However, regularly request your accountant provides ATO account balances from the portal. You can also organize direct portal access.
If you have a debt, the ATO usually sends monthly statements to your accountant showing the balance. Ask your accountant to forward you copies of these statements.
4. Keep ATO Informed of Director Addresses
Directors of companies should ensure their postal address is current with the ATO and Australian Business Register, and check mail daily if financial issues exist.
The ATO can issue Director Penalty Notices, which give directors 21 days to act once notified or become automatically liable for company debt if unpaid. These notices stand except in exceptional circumstances, regardless of excuses.
5. ATO Interest Charges
Despite perception, the ATO is not a bank, though many taxpayers treat it as an unsecured lender. ATO data shows it was owed $35.3 billion in 2013-14 – nearly 2.3% of annual economic output. Outstanding tax debt grew 9.7% year-on-year.
ATO automatically calculates interest (currently 9.14%) and charges this to accounts. While tax deductible, with large debts interest compounds rapidly. However, if genuinely trying to pay, interest can generally be waived.
6. Avoiding Liquidation and Bankruptcy
Though sometimes unavoidable, with quick appropriate action and ability to pay debt within a reasonable timeframe, the ATO will often cooperate, provided you are not seen as taking advantage or likely to revert to non-compliance.
Repeat offenders or those considered intentionally avoiding obligations will have liquidators appointed, greatly reducing chances of a positive outcome. Liquidators must recover funds for creditors, usually the ATO. If assets exist or creditors will fund investigations, liquidators will show little leniency.
With substantial ATO debt, directors often divert funds personally, enabling liquidators to pursue recovery. Their only payment comes from recoveries.
7. Learn From Mistakes
Analyze what caused ATO or other debts, seek expert help, and implement controls to stop recurrence. We all make mistakes, but learning from them is vital for future success.
8. No More Phoenix Activities
Previously some directors abused the system by continually liquidating indebted companies and starting afresh to avoid debts. The ATO and ASIC now monitor such “phoenix” activities and require upfront tax payments from suspected operators. This black economy practice is now tightly controlled.
9. ATO Debt Write-Offs – The Debt Doesn’t Disappear
The ATO rarely writes off debt apart from interest and penalties, but may cease collection efforts if considered uneconomic or the taxpayer disappears. The debt remains, however, and will be pursued again in the future if income exceeds thresholds or a company re-emerges. Debts only permanently disappear if companies are deregistered or fully wound up.
10. Seek Professional Help Early
Don’t ignore ATO debts as they won’t disappear. Act quickly as delays make resolutions harder. Call a professional for a no obligation discussion on 1800 630 531 if struggling with ATO debt.