have a debt with the australian taxation office? here’s what to do next

Few things ignite fear in small-biz owners quite like the Australian Taxation Office. While the purpose of this entity is to make sure everyone’s doing the right thing and paying their way, it can admittedly be a tad scary when you find yourself in debt to the ATO. Financial counsellor Rosemary Steinfort lets us in on what to do if you have a debt with the ATO, how best to communicate with it, as well as what powers it actually holds.

FIRST THING’S FIRST So, you’ve got a debt, and then you don’t pay it back – what happens next? Rosemary says that if you fail to set up a payment plan for your debt with the ATO, the ATO will add a General Interest Charge (GIC) to your debt. Basically, the GIC accrues daily on a compounding basis, adding to your debt every day that it remains unpaid. “If the taxpayer doesn’t engage with the ATO in some way to acknowledge the debt and offer a solution to paying it, the ATO may take further action,” Rosemary explains. “The debt may be sent to a debt collection agency and they will contact you directly.”

NEW PLAYERS ON THE SCENE The ATO has recently changed its process to now engage external debt collection agencies to chase up some ATO debts, where previously all recovery action was done by the ATO internally. Rosemary warns that this change of method isn’t one to take lightly, as “debt collectors can be more aggressive in their collection practices.” If you have a debt, it’s a good idea to engage with the ATO directly as soon as possible to prevent the debt from being sent to a debt collection agency. If your debt is sent to a debt collector, you will be sent a final notice that gives seven days to pay from the date of issue – otherwise, the ATO may garnish income, or in some cases commence legal action. Rosemary points out that there is also the option of setting up a payment plan with the debt collector to repay the debt.

WHAT IF YOU CAN’T AFFORD IT? While payment plans are the usual way forward in repaying a debt, if you are in a position in which you can’t afford a payment plan, it’s important to contact the ATO before the due date to discuss other options. “If the taxpayer is experiencing hardship due to ill health or loss of employment, they may be able to have the debt put on hold, so they do not need to pay it until their situation improves,” Rosemary explains. “It’s important to note that GIC may be added to the debt that is on hold – although there may also be the possibility of the GIC being refunded once the debt has been repaid.

YOUR TAX RETURN MIGHT NOT BE RETURNED If you’ve got a debt with the ATO, don’t get a fright if your tax refund suddenly disappears. It’s likely that if you get a tax refund in your latest tax return, the ATO will use the refund to reduce your tax debt. The same thing may happen if you have a HECS debt – your tax refund could also be used to offset that debt by applying any tax refund toward your compulsory repayment amount.

WHAT IS THE LIKELIHOOD OF LEGAL ACTION? It’s pretty unlikely for the ATO to take legal action over an unpaid debt, however Rosemary points out that it can sometimes be the last resort if a significant amount is owed (for example, over $10,000). “Once the ATO commences legal proceedings, if a payment cannot be made or a payment plan established, the end result may be forcing bankruptcy,” Rosemary says. “While this is unlikely to happen for most people, it is still best to engage with the ATO in case they do consider taking the next step.”

WHAT POWERS DOES THE ATO ACTUALLY HOLD? Rosemary helps us break down what the Australian Taxation Office can and can’t do. It can collect tax information that should be provided by taxpayers and access that information by searching premises if suspected information is being withheld; initiate court proceedings if the ATO believes a taxpayer is not compliant for reasons such as not lodging tax returns or failing to pay taxes; enact debt collection practices to collect unpaid tax debt; match data to confirm taxpayers’ correct information about their income, which may include income from “hobbies” in the sharing economy (such as Airbnb and eBay) – the ATO will determine if this is a business rather than a hobby depending on the income received for the tax year; access overseas information if they believe a taxpayer is earning income overseas and not declaring it in their Australian tax return.

However, there are limits to the ATO’s powers. Rosemary explains how these limits include legal professional privilege between a lawyer and a client involved in litigation with the ATO. “The ATO’s powers may also be restricted by the Commonwealth Ombudsman and the Inspector-General of Taxation, who investigate tax payer complaints about the ATO,” she adds.

COMMUNICATION IS KEY Ultimately, if you have a debt with the ATO that you’re struggling to repay, chat to someone about it as soon as you can – and especially before the stipulated timeframe to repay the debt is up. This might mean setting up a payment plan through your MyGov online account, or contacting the ATO by phone if you’re unable to repay your debt within the timeframe the ATO has given you. “If you cannot manage repayment of the debt and the ATO is unwilling to assist you, then contacting a financial counsellor may be an option as they can advocate on your behalf – especially if you are in financial hardship for whatever reason and have other debts that are unmanageable,” Rosemary says. The best way to get chatting with a free, confidential and independent financial counsellor is by jumping onto the National Debt Helpline for assistance. And always remember – you’re not alone in conquering your debts.

*Quick financial disclaimer. The information above doesn’t constitute financial advice, and it doesn’t account for your specific circumstances or financial goals. Make sure you get some independent guidance from a professional you trust. 

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