The ATO can issue a ‘Notice of estimate of liability’ (or an ‘Estimate Notice‘) if it believes that you have overdue:

• pay as you go (PAYG) withholding amounts; or
• superannuation guarantee charge (SGC) that has not been assessed.

An Estimate Notice is a formal notice that the ATO can issue under section 268-15 of Schedule 1 to the Taxation Administration Act 1953.

The ATO has a similar power in relation to income tax, under which it can issue a default assessment if you have not lodged your income tax return.

When the ATO issues Estimate Notices

The ATO can use its power to estimate PAYG withholding and SGC liabilities in many situations.

Example 1 – An Uncooperative Business Owner

The ATO may issue an Estimate Notice when it has tried to audit a business but has not received help from the business owner.

Case Study

Henry runs a cafe as a sole trader. He has several employees who work in the business. He is busy and often gets behind with his paperwork and tax obligations.

He has not lodged his BAS for a couple of years, which means that he has not reported his PAYG withholding to the ATO.

The ATO calls him several times on his mobile phone, but he misses the calls. The calls come from an unknown number. He does not have voicemail, so the ATO cannot leave a message. Because of this, Henry doesn’t know that the ATO is chasing him.

The ATO then sends a letter to the cafe. The staff put this in a pile of mail, which Henry doesn’t often open. He only opens the ATO’s letter about a month later.

The letter encourages Henry to lodge his BAS. It also requests documents to help the ATO determine his PAYG withholding liability. The due date to comply with the letter has already passed.

He calls the ATO audit officer and explains that he has been busy. He promises to get documents to the ATO within 2 weeks.

Henry does not prioritise this and he does not provide the documents during this time.

Because of this, the ATO decides that Henry is not cooperating. It issues him with an Estimate Notice for his PAYG withholding tax. On top of this, the ATO charges an administrative penalty of between 75% – 90% of the actual PAYG amount.

Note: the ATO could have instead decided to prosecute Henry under section 8C of the Taxation Administration Act 1953 for not lodging his BAS.

Example 2 – Suspected phoenix activity

Another common situation in which the ATO will use estimates is where it considers there to be phoenix activity. That is, if the ATO believes that:

• the same people operate the same business through a string of entities, and
• each entity is shut down without paying its tax obligations (including PAYG withholding and SGC). The business is transferred to a new entity and the cycle repeats.

In this situation, the ATO can estimate the unpaid tax liabilities. This will allow it to create the debt under law, so that it can start pursuing the debt (e.g. through the courts).

How the ATO estimates liability

There is no prescribed process for how the ATO comes up with its estimate. It can take into account anything it wants. For example:

• it is likely the ATO will look at your past PAYG withholding amounts or superannuation payments.
• the ATO can access your bank records to see what you have paid to staff and treat these amounts as after-tax wages
• the ATO could speak to your employees about the amounts they have received

The only restriction on the estimate of the liability is that it must be reasonable.

The administrative penalty that applies to an estimated liability

If the ATO issues you with an Estimate Notice, you will also be charged an administrative penalty that is equal to 75% of your primary tax liability.

This penalty is charged under subsection 284-75(3) of Schedule 1 to the Taxation Administration Act 1953. It can be increased by 20% if you have previously received an Estimate Notice, or if you receive an Estimate Notice in relation to multiple tax periods at once.

Example 
You receive the following Estimate Notices from the ATO for PAYG withholding amounts:

• the June 2015 quarter: $4,000
• the September 2015 quarter: $4,000

Your penalties will be:

• the June 2015 quarter: $3,000 (being 75% of the primary tax)
• the September 2015 quarter: $3,600 (being 90% of the primary tax)

The reason the penalty for the September 2015 quarter is higher is because the ATO increases the 75% penalty by 20%. It does this because it is the second time that it has imposed a penalty on an estimated amount.

Note: the 20% increase applies to the penalty percentage. That is, 20% of a 75% penalty equals 15%. This 15% is added to the 75% penalty. This means the total increased penalty is 90% of the underlying tax debt. 

It may be possible to have this amount remitted, if you can show the ATO good reason why you did not lodge the necessary returns yourself.

The debt becomes due when the Estimate Notice is issued

Once the ATO has issued you with an Estimate Notice, you are liable to pay the estimated amount. The amount in the notice is now a tax debt that is due and payable to the ATO.

This means that the ATO can start debt recovery action for this amount. For example, it can:

• serve you with a summons (if you are an individual)
• issue a Statutory Demand (if you are a company)
• issue a garnishee notice to your bank or anyone else who holds money for you

The ATO has the power to take recovery action even if you believe that the amount that it has estimated is inaccurate.

The ATO can serve a DPN for an estimated liability

The ATO can use a Director’s Penalty Notice to make a director liable for any unpaid PAYG withholding liabilities of a company.

If a company hasn’t reported its PAYG withholding liabilities and/or SGC to the ATO, then the ATO can issue an Estimate Notice to the company. It can also issue a DPN to the directors for the amount covered in the Estimate Notice. If certain steps aren’t taken, then the ATO can pursue that director personally for these amounts.

This is a strategy that the ATO has employed for dealing with suspected Phoenix arrangements.

The general interest charge applies to an estimated liability

The general interest charge (GIC) can apply to an estimated PAYG withholding amount liability, but not to an estimated SGC amount.

The GIC is calculated from the date on which the underlying tax liability was due – which can be quite some time before the Estimate Notice was sent.

Example 
On 28 August 2017, the ATO issues you with an Estimate Notice for PAYG withholding amounts for the June 2015 quarter.

Your due date for the payment of the PAYG withholding amounts for that quarter was 28 July 2015.

This GIC is applied from 29 July 2015, because your payment has been overdue since that date. This is even though the Estimate Notice wasn’t issued for another 2 years.

What to do when you receive an Estimate Notice from the ATO 

When you receive an Estimate Notice, you should also receive a template statutory declaration. You must complete this declaration if you want the ATO to reduce or revoke any of the estimates.

The statutory declaration should set out the actual amount of the liability. If there were no amounts that should have been withheld or paid, this should be stated in the declaration.

The tax law lists some very specific information that a statutory declaration must include. It is important to get advice from a tax expert before submitting the declaration.

You should return the statutory declaration to the ATO within 7 days. The ATO may allow an extension – but it is best to act quickly and not assume that the ATO will give you an extension.

The ATO will reduce or revoke the estimate in accordance with the statements in the statutory declaration if it:

• receives the statutory declaration in time; and
• accepts the claims made in the declaration.

A statutory declaration is a formal legal document and there are significant consequences for making a false or misleading declaration.

Firstly, the ATO will not accept a false or misleading declaration and it will have no effect to reduce or revoke the ATO’s estimate of liability.

Secondly, you may be prosecuted for making a false statement. If you are convicted, you could be fined or jailed (or both).

If you don’t submit a statutory declaration and the ATO proceeds to debt recovery proceedings based on the estimate, you can defend those proceedings by filing an affidavit about the correct amount of tax liability. Once again, there are particular requirements about what should be in this affidavit. You should have a tax dispute expert help you to prepare this.

A note about unpaid superannuation

The ATO can issue a SGC default assessment instead of an Estimate Notice. This works in a similar way. That is, you will be liable to pay the amount in the default assessment straight away and penalties will apply.

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• Director Penalty Notice – personal responsibility for company tax