The Australian Taxation Office (ATO) estimates that approximately $50 billion in taxes remain unpaid, with small businesses accounting for two-thirds of this amount.
During the pandemic, small businesses were among the most affected, prompting the ATO to extend leniency on filing deadlines and the pursuit of unpaid tax debts.
While this relief provided crucial support, it also led to a significant increase in outstanding filings and tax liabilities.
However, the ATO has now shifted its approach and is ramping up its debt recovery efforts. This makes it critical for small businesses to stay informed about their tax obligations to avoid heightened scrutiny from the ATO.
In this blog, we aim to provide small business owners with a clear understanding of how the ATO views taxpayers. This insight is crucial, as it allows you and your tax advisers to develop strategies that lead to more favourable outcomes.
Essential Steps in Negotiating Payment Plans with the ATO
Catch up on outstanding lodgements
When addressing tax debts and negotiating with the ATO, it’s crucial to demonstrate behaviours the ATO considers “Good Behaviours.” This primarily means lodging returns on time and paying tax debts promptly and in full. Adhering to these practices is the best way to avoid unwanted scrutiny from the ATO.
Keeping your tax lodgements up to date not only keeps the ATO satisfied but also provides you with timely information on your business’s financial performance, which is essential for informed decision-making. Therefore, if you have overdue lodgements, completing them should be your first priority. This proactive approach is viewed favourably by the ATO and can significantly aid in negotiating better outcomes.
Pay the outstanding tax debts
Lodging your outstanding tax returns is just the first step. The next important task is to pay off any outstanding tax debts. The ATO expects payments to be made on time and in full, and doing so is a key part of demonstrating good behaviour.
Many small business owners find this step challenging due to financial constraints or external factors. To navigate this, assess your business’s capacity to pay. Determine your estimated monthly surplus or profit and allocate a portion of these funds toward repaying your ATO debt in monthly instalments. An initial lump sum payment can reduce interest charges and demonstrates your commitment to compliance.
If you still have a remaining balance after the lump sum payment, explore the additional options we outline below to effectively manage the remaining debt.
Payment Plans
If your small business is struggling to meet tax obligations, negotiating a payment arrangement with the ATO could provide much-needed relief. Notably, businesses that have consistently exhibited good behaviours are more likely to secure favourable payment terms in these negotiations.
Payment plans involve setting up a structured payment schedule to repay the debt in instalments over an agreed period. A payment plan is essentially a formal agreement that you will pay fixed instalments towards your existing debt, lodge all future returns on time, and pay all future debt on time and in full. Setting up a payment plan will also mean the ATO is less likely to continue with enforcement or firmer action activities including issuing Director Penalty Notices (DPN), statutory demands, and winding up applications.
It’s worth noting that entering an ATO payment plan does not waive the interest charged on overdue amounts. There is a possibility of requesting interest charge remission, but this is only possible once the principal debt has been repaid in full and is more likely if you have exhibited good behaviours. However, there is no guarantee on these requests being accepted.
Deferral of Payment
In certain dire situations, the ATO may grant deferrals for paying your debt.
These are typically granted if paying the debt off immediately would cause significant financial hardship, or you have been impacted by other adverse circumstances, such as natural disasters or death and serious illnesses.
Deferrals act as a short-term extension to a debt’s due date and can act as a temporary measure. This does keep interest charges from accruing in the meantime, but you should be using this deferral period to come up with a sustainable strategy to resolve the tax debt issue once the deferral ends.
Consolidation of Loans
Another option would be to explore other financing options to repay your tax debt. As touched on before, the ATO does apply interest charges (General Interest Charges or ‘GIC’) for any overdue amounts.
Make sure that you stay informed with up-to-date interest rates. These rates are indexed every quarter with the RBA Cash Rate, plus an additional 7%.
This added rate acts as a penalising measure for small businesses that are consistently behind on tax payments.
As such, it may be a commercial alternative to seek out alternate funding from a bank or financier with more favourable credit terms.
It is important to note that third party lenders will have strict terms regarding loan agreements and repayments. We recommend thoroughly reviewing any loan agreement to ensure it will provide a better outcome financially.
Bad Behaviours
All the steps outlined above are focused on engaging with the ATO, keeping up to date with lodgements, and staying on top of your tax debts.
These steps show the ATO that you are proactive in maintaining compliance and are taking steps to ensure the sustainability of your business.
The other side of this is understanding the actions (or inactions) that will harm your business’ relationship with the ATO and your ability to negotiate better outcomes.
The single worst step you can do is nothing at all. Not communicating with the ATO and failing to respond to the ATO’s direct communications and/or communications that your tax accountant receives on your behalf is seen by the ATO as bad behaviour.
The first few reminders from the ATO may come in the form of courteous written reminders and phone calls notifying you of outstanding debts and lodgements. If these go unanswered, the reminders take more serious note, and if continued to be ignored will quickly escalate through to strong enforcement actions.
The ATO maintains a record of all outgoing and incoming communications with taxpayers so non-communication can stain negotiations. The simplest phone call to the ATO or your tax agent advising what you intend to do and the timeline you are aiming for will go along way with the ATO. It is important to note though, that once you advise the ATO on a particular strategy or timeline, it is important you stick to it. This helps build trust with the ATO to show that you will do what you say you will do.
Another common issue we see is when taxpayers have taken the steps to bring themselves up to date, enter a payment plan, then fail to make the payment on a plan, or fail to lodge and pay the next lodgement on time.
Failing to adhere to a payment plan is a setback which sometimes may be caused by unexpected or unforeseen events. While a one-off instance is not great, the best thing a small business can do is get back on track with a revised arrangement. However, if missing a payment plan or lodgement becomes a habit, it will likely hinder future efforts to negotiate with the ATO.
That is why it is important you establish the necessary procedures to ensure that the payments are made on time and correctly, as repeated failed payments plans can limit your options.
Set up scheduled payments in your online banking, calendar reminders, or request reminders from the ATO be sent to your phone. Take steps to ensure that you remain compliant to the ATO’s payment terms because the alternative of stronger enforcement action is much harder.
Small Business Restructuring Plan
If a small business does reach a point that the current tax debts for the business are too much, there is a process that you should consider before speaking to an insolvency practitioner or liquidator.
The Federal Government implemented a simplified debt restructuring framework called a Small Business Restructuring Plan, or SBRP.
This framework essentially allows for financially distressed small businesses to continue operating under existing management by agreeing a plan with creditors, including the ATO, reduce your debts and arrange a payment plan on the remainder.
An SBRP is only available if you are a company.
Need help negotiating a payment plan with the ATO? Connect with our team at Blackwattle Tax.
At Blackwattle Tax, we specialise in assisting business owners like you to assess your options and get you back on track to healthy operations.
With our guidance and expertise, we can help you negotiate with the ATO and ensure compliance with all legal requirements.
As your trusted outsourced accounting partner, we offer a wealth of expertise through our team of seasoned professionals, including chartered accountants and registered tax agents.
Our goal is not only to mitigate the risk of FTL penalties but also to give you peace of mind knowing that your tax affairs are in capable hands. At Blackwattle Tax, we have a proven track record of supporting businesses across diverse sectors.
Why Choose Blackwattle Tax?
- Expert Guidance: Our professionals are here to help you successfully modernise your payroll reporting.
- Tailored Solutions: We provide customised tax strategies to meet your specific business needs.
- Proven Success: Our clients benefit from our comprehensive support, leading to better financial management and compliance.
Schedule a FREE 30-minute consultation today to discover how we can help you make strategic decisions and streamline your business operations.
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Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.
