What to do when you owe tax debt
ATO debt or tax debt is one of the worst kind of debts to owe. Not just for you or your business, but for the Australian economy too. Did you know that there is an estimated 19 billion dollars of outstanding tax owed to the ATO? Wowsers, that’s a lot!
But what can you do about a huge tax bill? There are options available but your individual circumstances will determine the best course of action to take.
Can I get a loan to cover my tax debt?
That will depend on a number of factors. Based on our experience and the experience of our clients, obtaining an unsecured loan for tax debt is unlikely. Your ability to refinance a property will ultimately come down to equity and serviceability in addition to other lending criteria.
If you have little to no assets and a large tax debt – lending isn’t likely to be an option.
Can I try to make an arrangement for my tax debt?
Yes, you can. You can do this by contacting the ATO and requesting a payment arrangement. In our experience, 24 months is commonly the longest duration for an ATO payment arrangement. Based on the experience of our clients, the ATO is unable to agree to arrangements that would otherwise be unsustainable or exceed a reasonable time frame ie 2 years. Granted, it may seem a bit unfair, but you’ve got to remember that the ATO isn’t a bank.
The tax office may request a lump sum payment and allow for the balance to paid over instalments. Alternatively, they may agree to instalments without any up front payment but that’ll be for the ATO to decide.
Also, you’ll more than likely need to demonstrate that you not only have the ability to pay the debt back within a “reasonable” time frame but that you’re also able to meet any current and ongoing tax obligations at the same time.
If your tax debt is large, you’ll need to consider whether paying it off over 24 months (plus interest) is even mathematically possible.
If it’s not, you may have difficulty proving to the ATO that an arrangement is a reasonable option in the first place.
What can the tax office do if I don’t pay my tax debt?
Quite a lot actually.
They may initially choose to refer the debt to an external debt collection agency who’ll pursue you for the outstanding amount on the ATO’s behalf.
Recent changes in legislation now allow for the ATO to report outstanding business tax liabilities to credit reporting bureaus. This may occur if there’s been no attempt to resolve the debt or engage with the ATO on your end.
They may then take stronger action if;
- You’re unwilling to work with the ATO
- You default on any agreed payment arrangements
- You don’t have the ability to pay the debt and you don’t take steps to otherwise resolve the situation
- An audit revealed deliberate tax avoidance on your part and you are continuing to employ the same strategies
- It looks like you’re running a Phoenix company
Stronger action will typically involve:
- A Garnishee notice against wages through your employer or contractors, financial institutions with whom you hold accounts and people who owe you money from the sale of an asset ie purchasers, solicitors and real estate agents
- A Garnishee notice against trade debtors and merchant card facility suppliers if you’re running a business
- If you’re running a company, the ATO may issue a statutory demand. Should your company be unable to pay the outstanding debt in full or come to a suitable arrangement with the ATO, the tax office may use this as evidence that the company is insolvent in an application to wind up the company in the Federal Court
- A liquidator will be appointed to sell company assets if the court orders a wind-up
- You might receive a Directors Penalty Notice (DPN). The result is that directors may incur personal liabilities equal to the unpaid company PAYG and Superannuation guarantee
- You might receive a claim or summons issued by the court. Consequently, a judgment might be made against you
- A judgment will allow the ATO to issue a Bankruptcy Notice. If this happens, you’ll have 21 days to either pay the debt or make an arrangement with the ATO
- Should the 21 days pass without a suitable solution, the ATO may then issue a Creditor’s Petition through the Federal Circuit Court in order to make you bankrupt by sequestration order
Can I go bankrupt to clear my tax debt?
Yes, you can.
As a matter of fact, when you become bankrupt – all of your provable unsecured debt is no longer payable. Unsecured debt includes credit cards, personal loans, shortfalls and even tax debt. That means no more phone calls or threatening letters from creditors after you become bankrupt.
A Trustee in bankruptcy (like us) will be appointed to manage what will be known as “your bankrupt estate”. Bankruptcy generally lasts for 3 years and 1 day, but then you’ll be automatically discharged. If you’re looking for a more comprehensive outline of this option, we’ve got an entire section of our site devoted to covering what is bankruptcy?
How does bankruptcy work?
Whether or not your unsecured creditors receive any money from your bankrupt estate typically comes down to two key components:
- Do you earn enough money to have to make a payment towards your debt, and
- Do you own or have a financial interest in any assets that are not protected in bankruptcy
Making payments from your income in bankruptcy
Compulsory payments are based on your earnings and the number of dependants you support. Salary sacrifice, fringe benefits, allowances and child support payable will also be taken into account.
Assets and bankruptcy
If you own or have an interest in unprotected assets, they’ll “vest” in your bankruptcy trustee. ‘Vest’ is another way of saying ‘come into ownership of’. So when used in a bankruptcy context, it means that your interest in any unprotected asset will belong to your trustee after you become bankrupt. When an asset vests in your bankruptcy trustee, he or she will need to realise the value of your interest in this asset for the purpose of making some money available to your bankrupt estate.
Protected assets include standard household items, normal/ordinary furniture and personal effects as well as tools used to earn an income and motor vehicles (to a limit). It also includes some life insurance and superannuation policies as well as some compensation, superannuation and life insurance payouts received after the date of bankruptcy.
If you own or have an interest in unprotected assets – don’t panic.
It doesn’t always automatically mean that you have to lose them. There can be options available depending on your circumstances.
Overseas travel and bankruptcy
You’ll need consent from your trustee in order to leave the country. Luckily, the process is pretty straight forward and approval ordinarily depends on whether you’re meeting your obligation in bankruptcy.
Carrying on business while bankrupt
You won’t be able to be the director of a company while bankrupt. Although it can be possible to trade as a sole trader or a partnership – the partnership must be created after the date of your bankruptcy.
Bankruptcy and credit reports
Your credit report will show the bankruptcy listing for 5 years in total, but after that, it will disappear completely. There will also be a listing on the National Personal Insolvency Index (NPII). The Australian Federal Government manage this computerised data base, which stores information on all past and present personal insolvencies in Australia.
Where to from here?
Getting some advice on your situation and the options available is a great place to start.
Call 1300 369 168, start a chat, or make an online enquiry to speak with a specialised insolvency professional now.