What happens when you owe money to the Australian Taxation Office (ATO)? It is a scary thought for some. This brief post outlines your options and the methods the ATO uses to settle the debt.
If you’re reading this, you might be worried, so I’ll get straight to the point. Each section below is a different option, generally in the order that they occur. As with other dealings with the ATO, make sure you talk to your tax accountant.
The first letter
You will receive a letter from the ATO, saying that you have an overdue amount. It will ask for immediate payment and provide payment methods. The letter will also describe your options if you are having trouble paying the debt.
Don’t panic, but do take action. Either pay the amount, or make a payment arrangement. The ATO will be much more understanding and flexible if you communicate with them.
Make a payment arrangement
The first option is to contact the ATO to organise a payment arrangement. They are fairly flexible on repayment terms, unless you’ve broken too many arrangements with them in the past.
They will charge interest on this arrangement, so pay it off as quick as you can.
There is a helpful payment plan calculator on the ATO website. That page also describes your next steps to apply for a payment arrangement. For small debts, you can organise the arrangement online or using their automated phone service.
If you owe other money to the ATO, they may keep your refund and apply it to your debt. The ATO can also send your refund directly to other government agencies that you owe.
In all cases, the ATO will send a letter notifying you if this happens. If you are experiencing serious hardship (see below), you can request to receive your refund.
The ATO sends some debts to external debt collectors, such as Dun & Bradstreet. The collector will send you a letter to confirm their appointment, demand the funds, and provide payment methods.
You can negotiate a payment arrangement with the debt collectors. You may not be able to organise a payment arrangement with the ATO at this point.
Just like with the ATO, don’t ignore the collectors, or they will be less understanding and flexible, and proceed quickly to tougher measures.
This is where the process becomes unpleasant.
The ATO (or the external debt collectors) may issue a Garnishee Notice to people who hold money for you (or may do so in future), for example your bank or your employer.
Your bank will be required to transfer a lump sum to the ATO. Your employer will be required to send a percentage of your wage direct to the ATO.
The ATO will advise you in writing when it issues a Garnishee Notice, and include a copy of the notice itself. The letter will include an explanation and some alternative options.
Director Penalty Notices
When the company owes PAYG withholding or Superannuation Guarantee amounts, the ATO can demand this money from the directors. This bypasses one of the benefits of company ownership, i.e. that director assets are not (usually) at risk from company debts.
The ATO can use many of the options in this post against the directors, not just the company, even without issuing a Director Penalty Notice.
The ATO has many options under the general heading of ‘legal action‘, including a claim or summons, a bankruptcy notice, a creditor’s petition (a nastier bankruptcy notice), a statutory demand, and/or initiate the winding up of the company.
Before the debt is at this stage, you should talk to a liquidator, bankruptcy advisor or legal advisor about your situation.
Late Penalties and Interest
You may be charged interest on outstanding amounts, or fixed penalties for late lodgement or payment. Towards the beginning of the process, the ATO may reverse the penalties and/or interest if you resolve the issue quickly.
If the debt remains outstanding, more penalties and interest will be applied and the ATO will be less likely to reverse the penalties and/or interest.
Hardship and Natural Disasters
The ATO has dedicated pages and resources if you are experiencing serious hardship or if you have been affected by a natural disaster. In some cases, you can apply for help at a later date, but you should call your tax accountant as soon as possible.
The Important Points
1. Talk to your tax accountant at every stage.
2. Don’t ignore the debt.
As with anything tax, it’s best to ask your tax accountant about your specific situation.