Although businesses have the responsibility to keep their tax obligations up to date, it sometimes happens that, due to unforeseen circumstances, they are not able to pay the tax owed to the Australian Taxation Office (ATO).

The most important thing here is that businesses should not ignore the tax debt but take steps to rectify the situation. By taking steps early, it provides them with more options and usually better outcomes.

The ATO has the power to permit these businesses to pay their ATO tax debts off in instalments. Although this type of arrangement does not vary the time when the tax liability is due and payable, it does give businesses the opportunity to avoid any debt collection action. So, when the time comes, for example, when a tax is due or after a tax amnesty, businesses will be well served to negotiate with the ATO.

But how do these ATO tax payment plans work and what are some things that business owners should look at for when wanting to make these arrangements. This post looks at these questions in more detail.

What should be included in the application.

It’s important to remember that businesses should apply for a payment arrangement before the tax is due. If the due date is missed, businesses should apply for the payment arrangement as soon as possible after the due date. When making an application for a payment arrangement, a business should include:

  • An initial payment that the business can afford at that stage.
  • The reasons why the tax was not paid by the due date.
  • Relevant information to indicate why the business cannot pay the full liability.
  • Relevant information that the business is treating the tax liability just like their other debts or payment obligations.
  • A detailed proposal on how they can pay off their outstanding tax in the shortest possible time.
  • Relevant information to illustrate that the business can make the payments of the outstanding tax in instalments as well as their current tax liabilities or obligations.

In deciding whether or not to grant a payment arrangement, the ATO will consider various things like the information provided by the taxpayer, any other information the ATO has, the circumstances that led to the business’s inability to pay, and the taxpayer’s current financial position. Keep in mind, though, that these are not the only things the ATO will consider, but there are other facts as well and every case will be decided largely on its merits.

Things to consider

Considering the above requirements of an application for a payment arrangement and the things the ATO will look at when considering the application, it’s important to keep the following in mind.

The business must be able to not only service the payment arrangement but also its ongoing tax commitments. For this reason, it may be necessary to provide detailed financial statements in order for the ATO to consider the application. Here it’s therefore vital that the business budget for both debts. Because businesses should pay the outstanding tax amount as well as all future tax obligations, they should budget both amounts in order to avoid cash flow problems.

Apart from budgeting, businesses should, in fact, keep up to date with current tax obligations whilst the payment arrangement in place. So, businesses must still file tax returns on time and keep up to date with the tax liability. If the business doesn’t, the tax arrangement for the outstanding tax will default and the business will be liable for the existing tax obligation as well as the outstanding tax obligation.

It’s also important to remember that interest will apply to the ATO payment arrangement. Therefore, during the arrangement, the ATO will levy and the business will be liable to pay interest on the arrear tax amounts.

There is, however, an interest-free option available. When a business complies with certain eligibility criteria, it is possible that that business may be able to pay off the outstanding tax obligation over 12 months interest free. Typically, such a business would have to have a satisfactory tax record and the amount outstanding should be below the prescribed threshold amount.

In certain circumstances which are beyond the control of a business, the business can request a remission of any late lodgement penalties and interest charges. This can, for instance, include the death of a family member, the illness of a loved one, a marriage breakdown or other stressful situations. Once again, the merits of the situation will determine whether the remission is granted.

If the business does not act quickly in order to avoid a tax penalty, the ATO can issue a Director’s Penalty Notice that would make the director of a company personally liable for the tax obligations of that company.

Final thoughts

Every business has the responsibility and obligation to keep their tax commitments up to date, but sometimes this is just not possible for a variety of reasons. If this is the case, there is an obligation on the business to take the necessary steps to make a payment arrangement to get their tax obligations up to date.

Blaine Hattie is a commercial lawyer that regularly negotiates with the ATO on behalf of his clients.

Get the right advice by speaking with Sutton Laurence King Lawyers. Call us on 03 9070 9810 or email us on info@slklawyers.com.au