Payment arrangements with the ATO might save you. And they might drag you down even more. The reason is that payment arrangements don’t stop interest from accruing. Only deferrals do. And very few taxpayers get a deferral. The ATO charges a very high interest rate. Much higher than what a bank would charge you. So using the ATO as a bank will cost you.
Payment Arrangements
The cyclical nature of business means that taxpayers sometimes find themselves unable to meet taxation obligations in full by the due date. Where a taxation obligation remains outstanding after the due date, the Commissioner has the ability to follow up outstanding balances via any reasonable means.
That sounds very ominous and it is. The ATO engages debt collection agencies to collect what is theirs. And they don’t shy away from garnishee notices as a recent ABC 4-corners documentary lamented.
PS LA 2011/14
PS LA 2011/14 deals with debt collection, payment deferrals and payment arrangements. In this practice statement the Commissioner leaves no doubt that taxpayers need to organise their affairs in such a manner that payment of taxation obligations occurs by the due date.
However, the Commissioner does acknowledge that the timely payment of all taxation obligations is not always possible. In doing so, the Commissioner allows for payment deferrals and payment arrangements.
Payment deferrals
According to PS LA 2011/14, only extraordinary circumstances warrant payment deferrals. Examples of extraordinary circumstances are natural disaster, serious illness, certain legal impediments like the freezing of funds or embezzlement of taxpayer’s payment via a third party.
A payment deferral extends the payment due date to the new date. This is really important. It means that general interest charges (GIC) will not apply until after the deferred payment due date.
Payment arrangements
Payment arrangements on the other hand are an alternative to more formal debt recovery action. They don’t change the due date. They only changes the pattern of payment. GIC will generally continue to accrue on any overdue amounts. And that is a dangerous trap that might drag you even further down.
Application
In any application the Commissioner expects to see an explanation why payment by the due date is not possible. The Commissioner needs to ascertain that the taxpayer really can’t pay. And isn’t just unwilling to pay. And so the best way to show a genuine commitment to pay is an initial payment to the maximum extent possible.
The application needs to give a detailed statement of the taxpayers’ current financial position. And needs to outline how the taxpayer has tried to seek funding from other means. Satisfying the Commissioner that the taxpayer is treating debts with equal priority as for other obligations.
And the application needs to list a proposed payment timeframe based upon the shortest possible timeframe, taking debt recovery costs into account. The aim is for the Commissioner to assess whether the payment arrangement can be met without total outstanding taxation obligations growing.
Review
Once a taxpayer applies, the Commissioner needs to assess the application. And usually does this considering PS LA 2011/6 Risk and risk management in the ATO. And only agree to payment arrangements following those guidelines.
The actual process generally varies depending on the perceived level of risk to government revenue.
For taxpayers with a small debts and a good lodgement and payment history, the application and response usually happens over the phone.
For large debts the application process will need to be in writing. This is also the case when other factors indicate a greater level of risk. Examples are prior payment arrangement defaults, outstanding lodgments and multiple outstanding obligations such as income tax, BAS and SGC all outstanding at the same time.
The taxpayers needs to include as much relevant information as possible with the application, such as current management accounts and cashflow forecasts.
Ongoing Obligations
Where the Commissioner agrees to a payment arrangement, the taxpayer is to lodge all upcoming returns in a timely manner, pay all upcoming amounts on the due date and agree that any future refunds will count towards the outstanding balance.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.