Understanding Your Tax Debt:

If you do not dispute the tax debt, taking action typically involves two steps. The first step is to attempt to reduce the tax debt by seeking a remission of interest and any penalties. The second step is to attempt to enter into a payment arrangement with the ATO in order to give you time to pay the debt. These steps presume that you do not dispute your liability to pay the debt in the first place.

Reducing Tax Debt:

When you have an outstanding liability to the ATO, it will usually be made up of three parts: your primary tax, interest, and administrative penalties.

Primary tax

Your actual tax liability (primary tax) may only be a part of your total debt. Primary tax will include any sort of tax which you have been assessed as owing to the ATO. If you are an individual this will typically involve your personal income tax. If you are operating a business then your primary tax may also include GST and PAYG withholding.

There is generally no way of reducing your primary tax unless you dispute the assessment which led to its calculation. For example, if the ATO has reviewed your previous tax returns and made adjustments that result in higher income or lower deductions, you may be able to object to the assessment that was based on that review. This objection may ultimately lead to a reduction in your primary tax.

General Interest Charge (GIC)

A second part of your tax debt is the GIC. This is interest which accrues daily on your primary tax when your primary tax is not paid, causing your liability to increase. For small amounts of primary tax, the GIC will generally be small, and the ATO will automatically remit it to you (i.e. credit the interest to your income tax account). However, for a large primary tax liability, the GIC could lead to a substantial interest bill, especially if the tax debt has been outstanding for a long period.

If your tax debt includes a large GIC component, your best option is to lodge an application for remission of the GIC. Your application should include supporting documentation that demonstrates why it is appropriate for the ATO to grant you a remission. The ATO will consider your application and make a decision as to whether or not you should be granted a remission.

Administrative Penalties

A third part of your tax debt may include penalties. Penalties are often a significant component of our clients’ tax debts. Your administrative penalty can cause your tax debt to double. The ATO imposes penalties on taxpayers in a variety of circumstances. These include:
1. Penalties for failure to lodge your tax return or BAS on time, and
2. Penalties for making a false or misleading statement in your tax return.
However, if you have engaged a registered tax agent or BAS agent, you may be able to avoid being liable for administrative penalties. This depends upon whether you provided your agent with all relevant information relating to your tax affairs, and whether the circumstance leading to the penalty resulted from intentional or reckless disregard by your agent with respect to a taxation law.
If your tax debt contains an administrative penalty, your best option is to lodge an application for remission of the penalty. Your application should include supporting documentation that demonstrates why it is appropriate for the ATO to grant you a remission. The ATO will consider your application and make a decision as to whether or not you should be granted a remission.
Some penalties, such as a tax shortfall penalty, cannot be remitted. If your tax debt contains a penalty that cannot be remitted, you may be able to object to the penalty. Lodging an objection is a different process from applying for a remission.

Negotiating Payment Arrangements

Once you have taken all possible action to reduce your tax debt, the next step is to agree on a suitable payment plan with the ATO. If you have the means to pay off the entire debt now, then it would be best to do so as this will mitigate any further GIC accruing to your debt.

If you are unable to pay off the entire debt now, you should seek to enter a payment plan to pay your debt off in instalments. For small tax debts you can usually establish a payment plan with the ATO over the phone using its automated phone service. However, with large tax debts, the ATO may assess your personal financial situation or your business before deciding whether to accept a payment plan. If you have failed to comply with a previous payment plan without a reasonable excuse, the ATO will generally refuse to enter a new payment plan.

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