For many businesses, tax debt owed to the ATO can be a serious issue.
As of mid-2018, the ATO had a collectable debt of $19 billion, 70% of which consisted of debt owed by small to medium enterprises. This means that SMEs owed over $13 billion to the ATO.
Change in legislation means unpaid business tax is reported to credit agencies
In 2018, legislation was passed that empowered the Australian Tax Office to start reporting unpaid business tax debts to credit reporting agencies, making it possible for such information to be included in business credit reports. Under the new legislation, the ATO can report Australian businesses to the ATO that owe more than $10,000 that is more than 90 days overdue.
While this was a cause of concern for many, some believe that it levels the playing field by creating greater transparency about the financial health of businesses.
Income tax for individuals and sole traders
If you operate as a sole trader, you can quickly find out what you owe by using your myGov account. Your myGov account is linked to the ATO, so you can check for any outstanding balance and due dates for payments. If you don’t have a myGov account, you can create one.
You will also be informed about the amount you owe with a Notice of Assessment after lodging your tax return. The notice of assessment will show how much you owe, when the payment is due and your payment reference number.
When you earn income from a business, you might be required to make PAYG instalments. Based on income from the previous year, the ATO will notify you of what you owe in Pay As You Go (PAYG) instalments and how often you need to pay.
Business income tax debt
As a business owner, you can find out what you owe by logging into the ATO Business Portal. When you log in, you can find out when you need to lodge and pay.
If you are not able to use the business portal, you can check your latest income tax assessment or call the ATO on 13 28 66. Your Notice of Assessment will show the amount you owe, the payment due date and your payment reference number.
Disagreeing with your tax assessment
When you disagree with your tax assessment, you can dispute it with ATO. However, you are still required to pay the outstanding amount by the due date, unless you have made an arrangement with the ATO through a deferral or 50:50 arrangement. Any amounts owed to the ATO that are overdue incur interest. If the dispute is resolved in your favour, the ATO will refund interest on overpayments.
When seeking a deferral, you can write to the ATO with the reasons why you think the assessment is incorrect. The ATO may agree to defer recovery action until the dispute is resolved if you have a good payment history with the ATO. Interest will still apply from the due date on the amount that is payable when the dispute is resolved.
Another option offered by the ATO is what’s called a 50:50 arrangement, under which you pay 50% of the amount in dispute plus any other tax debts outstanding. You are also required to provide any information needed to resolve the dispute but you are allowed to defer paying the remaining amount until the dispute is resolved.
If the ATO determines that your objection isn’t correct, you will only be charged 50% of the interest that has accrued from the time you made the 50% payment.
What happens when you don’t pay the ATO?
If you don’t pay your tax debt on time, the ATO will automatically add a general interest charge (GIC) to the amount you owe, and the ATO debt will continue to increase while it’s unpaid. This interest amount is calculated daily on the amount outstanding on a compounding basis and added periodically to your account.
In some cases, the ATO may reduce or cancel the interest on your debt. Before deciding on this, you are required to explain why it’s fair and reasonable, given your circumstances, to have the interest reduced or cancelled.
The ATO uses refunds and credits owed to you to pay your ATO debt
In cases where you have a refund or credit owed to you, and you have new tax debt, the ATO will use the refund or credit to pay off your debt. The ATO is also required to use the funds to pay off debts to other government agencies, such as child support payments to the Department of Human Services. Once all debts have been paid, you receive the balance remaining. In cases where a person owing tax is experiencing serious financial hardship, the ATO may pay the refund to them and not use it for other debts to the government.
Steps the ATO Takes When You Don’t Pay Your ATO Debt
The ATO follows several steps when a debt is not paid. We will briefly look at each of these in order of severity.
Turning your ATO debt over to external debt collection agencies.
The ATO uses external debt collection agencies to collect routine income tax, activity statement and superannuation debts, up to $250,000. According to the ATO website, referral of your ATO debt to an external collection agency will not affect your credit rating. The ATO also notes that:
- It doesn’t ‘sell’ your ATO debt, as the debt remains payable to the ATO
- Debt collection agencies are not paid commissions
- It ensures that debt collection agencies provide a professional service
- It requires debt collection agency staff to comply with the guidelines that apply to ATO staff
- Debt collection agencies are required to meet all government security and privacy requirements.
An external debt collection agency will notify you in writing before calling you or your authorised contact. If you don’t reply by the date outlined in the letter, the debt collection agency will attempt to contact you by phone.
If you can’t reach an agreement about paying your ATO debt.
If you are not able to pay or reach an agreement about paying your ATO debt, the next steps taken by the ATO can include:
- Garnishee Notices – with a Garnishee Notice, the ATO can get a person or business that holds money for you (such as your bank), or will hold money for you in the future, to pay them directly to reduce your debt.
- Director Penalty Notice – with a Director Penalty Notice, a director can incur penalties equal to the amount of the PAYG withholding liabilities and superannuation guarantee charges that have not been paid. The ATO can issue the Director Penalty Notice which makes it possible to start legal proceedings to recover the penalty.
If the ATO is unsuccessful in these attempts at debt collection, it can take other steps, including:
- Filing a claim or summons
- Filing a creditor’s petition to make you bankrupt
- Issuing a statutory demand requiring a company to pay its entire debt or enter a payment plan with 21 days
- Taking action to wind up a company if it hasn’t paid its debts or entered into a payment plan.
If you are in business, staying on top of your tax debt can be challenging. ATO payment plans are not always suitable for SMEs.