How to handle a tax debt

After taking a softly, softly approach with taxpayers during the pandemic, the ATO has made it clear it will start chasing taxpayers for their outstanding tax related debts.

Starting with its aged debt book, the ATO is sending letters to taxpayers asking them to engage or face firmer action. An aged debt is an uneconomical debt the ATO has placed on hold and not taken any recent action to collect, but this is about to change.

Potential action includes offsetting tax refunds to pay tax debts and disclosing tax debts to credit reporting bureaus, a move that could affect your business’ credit rating and ability to raise funds.

Business taxpayers have also been warned about their potential personal liability under the director penalty notice (DPN) program for unpaid PAYG withholding and GST amounts.

Dealing with your tax debts

So, what are your options if you are having difficulty meeting your tax or employee super obligations?

The first thing to remember is not to panic. Ensure you lodge all your tax returns on time to avoid a late lodgement penalty and to show the ATO you are aware of your obligations and are doing your best to meet them.

Where you have a good payment history or are in serious hardship, the ATO will offer you support and you are likely to be treated more generously than if you have deliberately set out to avoid tax, or regularly fail to pay your tax.

If you can’t pay by the due date, you may be allowed to set up a payment plan. The ATO has a Payment Plan Estimator tool you can use to work out a suitable payment schedule. Daily interest on your unpaid debt will accrue, however, at an annual rate of 8.00 per cent in the July to September 2022 quarter.

Eligible small businesses owing activity statement amounts may also be able to make interest-free payments over 12 months.

What will the ATO do if I don’t pay?

Aside from charging interest, if you don’t pay, the ATO will begin offsetting future tax refunds to reduce your tax debt and debts to other government agencies, such as overdue child support.

The ATO may take stronger action with taxpayers unwilling to engage, repeatedly defaulting on payment plans, found to have deliberately avoided paying tax, or who are engaged in phoenix activities.

These harsher powers include issuing a garnishee notice or a DPN. Garnishee notices require an employer, bank or trade debtor to pay your money directly to the ATO to reduce your tax debt.

The ATO may also file a claim or summons, which can result in you receiving a bankruptcy notice, or a statutory demand and application to wind-up your company.

Missing super contributions

Failing to meet your obligation as an employer to pay Superannuation Guarantee (SG) contributions into your employees’ super accounts is also in the ATO’s sights.

If you don’t pay your required SG contributions by the quarterly payment deadlines, you must pay the SG Charge (SGC) and lodge an SGC Statement. The SGC consists of a shortfall amount, 10 per cent annual interest and an administration fee for each unpaid employee per quarter. You are also ineligible to claim a tax deduction for the SG contributions against your business income.

Penalties for SG non-payment

The ATO is prepared to support employers who engage and try to get things right with their SG payments but will take firmer action with businesses repeatedly failing to pay correct SG amounts or supply the necessary information.

With employers who pay and lodge their SGC Statement late, or who fail to provide information during an audit, the ATO can impose a Part 7 Penalty, which is up to 200 per cent of the SGC amount payable.

Company directors failing to meet their SGC liabilities risk having the business’ liability become their personal liability. The ATO may also start bankruptcy action or seek to wind-up your business.

Don’t ignore a tax debt

Communication with the ATO is essential when it comes to tax and super debts.

To get on top of the situation, contact the ATO or make an appointment with our Tax team to discuss your financial position and possible ways to pay your tax and super obligations. The sooner you act the better the outcome is likely to be, and the lower the costs to you.

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