In recent months, the Australian Taxation Office (ATO) has undergone a significant shift in its approach towards tax debt. With an increase in debt collection activity and a stricter stance on remission of penalties and interest charges, businesses must be proactive in managing their tax obligations. In this article, we explore the evolving landscape of tax debt and provide insights into the ATO’s current approach to debt recovery.
The two main interest charges
The ATO imposes two primary interest charges on tax debts:
- General interest charge (GIC)
- Shortfall interest charge (SIC)
The GIC is applied when a tax debt remains unpaid after the due date, compounding on a daily basis at an annual rate of 11.34%. The SIC, on the other hand, is levied when a return is amended, resulting in a higher tax liability, and carries an annual rate of 7.34%.
Remission of interest charges
Historically, the ATO has shown leniency in remitting interest charges, particularly during times of economic hardship such as the COVID-19 pandemic. However, the ATO has now adopted a stricter approach, making it more challenging to have interest charges successfully remitted. The ATO’s guidelines for interest charge remissions are outlined in PS LA 2011/12, which considers three scenarios for remission:
- Delays caused by factors beyond the taxpayer’s control, such as natural disasters, industrial action, or unforeseen collapses.
- Delays caused by the taxpayer but still deemed fair and reasonable to remit, assessed based on the perspective of ordinary taxpayers who fulfill their tax obligations.
- Delays caused by special circumstances, where a taxpayer’s payment history and the nature of the late payment are taken into account.
Payment plans
When facing an upcoming debt that cannot be paid on time, entering into a payment plan with the ATO is crucial. However, it is essential to meet the agreed-upon terms diligently, as even a single late payment may result in the cancellation of the payment plan and the resumption of debt collection for the entire tax debt. It’s important to note that being on a payment plan does not automatically qualify a business for interest remissions. Each remission request is assessed based on the circumstances leading to the late payment and the criteria mentioned earlier.
Director penalty notices and asset protection
The ATO has witnessed an increase in the issuance of Director Penalty Notices (DPNs) over the past year. Company directors can become personally liable for their company’s unpaid amounts, including PAYGW, GST, and SGC. The ATO’s heightened debt recovery activity has particularly affected small business owners, who account for a significant portion of the total debt. To protect themselves, directors should promptly assess their tax history and address any outstanding debt or compliance concerns. Seeking professional guidance, such as consulting with an accountant, can help navigate the implications of DPNs and determine the best course of action.
Considerations for businesses
Businesses must remain proactive and well-informed to avoid DPNs and effectively manage their tax obligations. It is crucial to ensure that registered business details are up to date with the Australian Securities and Investments Commission (ASIC) and the ATO. Ignoring correspondence from the ATO can have severe consequences, so timely engagement is essential. Seeking professional guidance and understanding the evolving landscape of tax obligations and debt recovery initiated by the ATO are key to protecting business interests.
The ATO is not a ‘bank’ but a collaborative partner
It is important that businesses should not treat tax debt as a ‘bank facility’. Taxpayers are encouraged to engage with the ATO promptly and manage their debts in a timely manner. While the ATO has the authority to report unpaid business debts to credit reporting agencies, this action can be avoided by actively engaging with the ATO to manage tax debts. Additionally, the Government plans to amend tax laws to deny deductions for ATO interest charges incurred on or after 1 July 2025, further reinforcing the importance of timely debt management.
Conclusion
As the ATO adopts a stricter approach towards tax debt, businesses must adapt and take proactive steps to meet their tax obligations. By understanding the ATO’s guidelines for interest charge remissions, engaging in payment plans, and promptly addressing outstanding debts, businesses can mitigate the risk of penalties and protect their interests. Seeking professional advice and staying informed about evolving tax regulations are crucial in navigating the changing landscape of tax debt and ensuring compliance with the ATO’s requirements.
At Regency Partners, we understand the challenges businesses face in dealing with tax debt and the evolving ATO regulations. Our team of experienced professionals is equipped to provide tailored solutions and assist you in effectively managing your tax obligations. Whether you require assistance in negotiating payment plans, seeking interest charge remissions, or addressing outstanding debts, our experts are here to help.
