Navigating outstanding debts can be a daunting task, especially debts with the Australian Taxation Office (ATO). The Albanese Government’s second Federal Budget included significant additional investment in the ATO to drive compliance and recover debts which indicates it is an area of focus and requires attention by business owners. Read more on the 2023-24 Federal Budget in William Buck’s Federal Budget Analysis.
It’s essential to understand how the ATO deals with overdue debts, including its approach to debt and the payment plans available to effectively manage your obligations. So, let’s dive in and demystify the world of ATO debt.
As at the end of FY22, the ATO’s collectable debt amounted to approximately $45 billion. Small businesses accounted for two-thirds of this debt, with 96% of it being for values below $100,000. The ATO currently has around 400,000 active payment plans, with approximately 300,000 belonging to small businesses.
The ATO’s approach to debt
- Prevention: The ATO employs SMS reminders and engagement programs to prevent debt accumulation.
- Early intervention: Self-service payment plans are offered as an initial intervention measure.
- Firmer action: Awareness letters are sent to encourage prompt payment and resolution.
- Stronger action: In cases of non-engagement, the ATO may resort to stronger measures, such as director penalty notices (DPNs), garnishee notices, winding-up applications, and disclosing tax debts to credit bureaus.
Repayment options
If you do find yourself in a position where you have a debt owed to the ATO and you are unable to settle it all at once, the ATO has several types of repayment options available.
Self-service payment plan: For tax debts under $100,000, the ATO provides a self-service payment plan option. This online service has a standard 28-day processing time. To be eligible, individuals, sole traders, or businesses must not already have an active payment plan for the same debt. The proposed plan should cover a period of two years or less, with the first payment scheduled within seven calendar days of the request (or 14 days if using direct debit). The ATO considers compliance history and other financial information to assess the likelihood of compliance.
Proposing a payment plan: When proposing a payment plan, you should consider using the ATO Payment Plan Estimator. This tool helps estimate payment plan arrangements and is also used by ATO staff. Assessing the capacity to pay is crucial, and you can use the Business Viability Assessment Tool for this purpose. Tailoring the proposal based on compliance history, risk mitigation, and the size and age of the debt is also recommended.
It is also worth noting that a condition of any payment plan with the ATO is that all future obligations (Tax, BAS, etc) are lodged and paid on time. If this is not done then the payment plan will automatically default which will revert the debt back to overdue
Assessing the capacity to pay: To assess your capacity to pay, the ATO requires specific information depending on what type of taxpayer you are.
Individual taxpayers will need to provide income sources including employment, interest, rent, royalties and dividends and provide an estimate of expenses.
Business taxpayers will need to provide, at a minimum, the business’s income and expenses over the last three months and other cash flow information including the seasonal nature of the business and reflection of ongoing activity statements.
Payment plan status
Payment plans fall into three categories:
- Active: Payments are made on time.
- Arrears: There is a small shortfall between the expected balance and the actual payment. The payment plan remains active, and the client is given an opportunity to get back on track.
- Defaulted: Conditions are not met, and ongoing obligations become problematic. The ATO may consider a new payment plan.
Like with any creditor, you need to proactively communicate with them if there are any issues with repayments. If the ATO doesn’t receive engagement or response, they may resort to firmer and stronger actions, including Director Penalty Notices, garnishee notices, winding-up applications, and disclosing tax debts to credit bureaus. We are seeing the ATO be more assertive in this area in recent times.
It’s worth noting that the ATO prioritises Superannuation Guarantee (SG) debts over other categories, regardless of their value. SG debts are the most likely ATO debts to result in DPN’s so extra caution should be taken in relation to these debts.
If you currently owe the ATO money and aren’t sure what to do next, contact your local William Buck advisor for a discussion on how best to resolve and plan for the future.
