If your client’s dire financial straits includes a tax debt

Whether your client is usually running a business, or trying to under these COVID-19 conditions, or is just an individual trying to make ends meet, there is nothing worse for them than to find, on top of everything else, that they have ended up with a tax debt owing to the ATO. This may also be accruing a general interest charge and perhaps even a shortfall interest charge.

The Australian tax system operates under a system of self-assessment, and this applies regardless of the type of tax being assessed, whether that is GST, FBT or income tax. Especially without the guidance of a tax professional, it is not unheard of for taxpayers to face the prospect of being saddled with a tax debt that’s still on hand long after the original tax amount’s due date has come and gone.

This can be brought about due to cash flow difficulties or perhaps the effects of personal hardship. Each unfortunate circumstance can prevent affected taxpayers from meeting their obligations on time, ending up with them carrying the tax debt.

Missing a tax deadline will lead to the resulting outstanding debt being subject to the ATO’s general interest charge (GIC). The current rate of interest charged for the October to December 2020 quarter is 7.10% (compounding daily). But don’t forget that the ATO has factored into the available guidance (see PS LA 2006/8) the conditions where interest charges can be granted remission.

Let’s be clear. The ATO takes debt collection very seriously, as there is substantial revenue at stake. For example, the latest ATO annual report highlighted that collectable tax debt had grown to more than $34.1 billion for 2019-20 — up from $26.6 billion the year before.

According to the report, most of this relates to small businesses ($21.4 billion). To its credit, the ATO’s stated strategic focus is to “prevent debts arising”, but where they do arise it has also vowed to “take the most effective recovery action at the most appropriate time”.

Preventing tax debt in the first place
They say that prevention is the best cure. As such, it is wise to offer clients guidance on good record keeping and managing cash flow, as these are the keys to avoiding a tax debt.

Particularly relevant for small business owners, there are certain measures that you can help with to prevent a tax debt from arising. Namely:

  • keeping their GST and income tax payments separate from their other finances
  • keeping an eye on their cash flow, if they are amenable to this, and helping predict monthly income and expenses, and
  • updating their business records frequently.

Getting into a payment plan
If your client has difficulty meeting their tax debts, then a payment plan can be arranged with the ATO to alleviate such difficulties. Payment arrangements can generally be applied for online, perhaps with your help, usually for individuals and sole traders. Here is a link to the ATO’s payment plan estimator.) But for large amounts or for more complex cases, a pre-emptive telephone call is generally recommended (and in some cases necessary), as this will clear up what needs to be put in place (13 11 42).

ATO guidance
The ATO has provided general guidance for practitioners on tax debts, updated for COVID-19. It has also guidance directed to taxpayers that may help clients understand their options.

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