Having a tax debt is a burden that can affect everything from your business through to your emotional state. But in some cases, you can get a release from your tax debts.
There are many reasons why you may accrue tax debt.
The most common is a miscalculation, either on your part or by the Australian Taxation Office (ATO) (also known as the tax office). Simple oversights can lead to large sums of money going unaccounted for. And when the ATO decides that it’s time to collect, you then face an enormous challenge. The ATO may send a letter or make contact by phone to notify taxpayers of outstanding debts. If these debts are not addressed, there is also a risk of legal action being taken to recover the amount owed.
The emotional burden that living with tax debt can create for taxpayers is something that should never be underestimated.
Having a tax debt places an immediate strain on your finances. Furthermore, it means you have to interact constantly with the ATO, which creates even more stress.
However, there is some good news.
In certain circumstances, you may be able to get tax debt relief.
This article explains the conditions you must meet to get it, provides details on the process, and to which taxes it can apply.
Who Can Get Release from Tax Debts?
The ATO only offers specific relief services to the following:
- Individuals
- Trustees of the estate of a deceased person
Furthermore, you can only apply for tax debt relief if the debt is such a burden that it will have an extremely negative impact on your livelihood. This means the debt leaves you unable to provide for the essentials in life, such as housing, food, and education.
If the ATO believes you are capable of affording these essentials while repaying the debt, it’s unlikely they will grant relief.
Unfortunately, tax debt relief does not extend to companies, partnerships, or trusts. Any business tax debts you accrue in one of these structures must be paid. However, the ATO does offer separate services for businesses that are experiencing financial difficulty. Business tax debt may require different solutions, such as negotiating payment plans or setting up a payment plan online with the ATO to manage repayments. Businesses may also enter into formal agreements, such as debt agreements or Personal Insolvency Agreements, to resolve tax debts. In cases of business insolvency, the ATO will participate alongside other creditors, and decisions are made collectively. Additionally, refunds may be used to offset business tax debts or improve cash flow. Furthermore, businesses have the option of taking out an unsecured business loan to help them to deal with their tax burdens. Professional advisors can also act on behalf of businesses in negotiations with the ATO to secure favorable payment plans or agreements.
Which Tax Debts Can Be Released?
While the ATO offers relief for a range of personal taxes, it does not offer relief for all of them. The following are the taxes that you cannot apply for relief from:
- Excess Contribution Tax
- Super Guarantee Charge (the ATO may require payment of the full amount for certain liabilities, such as the Super Guarantee Charge)
- Division 293 Liabilities
- Goods and Services Tax
- Director Penalty Notices
- PAYG Withholding
In limited circumstances, the Finance Minister may waive debts owed to the Commonwealth.
Thankfully, this leaves a large list of taxes that you can get relief from. The following are what you should focus on if you’re looking at releasing your tax debt:
- Medicare Levies
- PAYG Instalments
- Income Tax
- Mining Withholding Tax
- Fringe Benefits Tax
- Fringe Benefits Tax Instalments
- Medicare Levy Surcharges
- Managed Investment Trust Withholding Tax
The ATO considers the details of each case when determining eligibility for relief. You may also be able to claim relief from some of the fees and penalties associated with these types of tax debts. If you believe the debt amount is incorrect, you may dispute it with the ATO.
How Can You Apply for Tax Debt Relief?
The application process is fairly simple.
The ATO provides an approved form that all applicants must use when applying for tax debt relief. This form outlines the conditions you must follow and collects the data the ATO needs to make their decision. Applicants must provide full details of their financial situation, including income, assets, liabilities, and any other relevant information.
However, filling out the form is not a guarantee that you will receive tax debt relief.
The ATO takes several factors into account before making its decision. These include the following:
Your Financial Circumstances
As mentioned, tax debt relief is only available to those who face dire financial circumstances.
The ATO will examine your ability to pay for life’s essentials while facing your current tax burden. If it finds that you can still afford to provide for yourself and your family while repaying the tax, it’s unlikely that you will receive relief.
This examination will look closely at your income and expenditure. In some cases, the ATO will make recommendations on how you can reduce your expenditure while offering an alternative payment plan. You may also be able to enter into a formal agreement with the ATO to settle your tax debt over time.
Your Assets and Liabilities
The ATO will want to know what assets you’ve purchased and when you purchased them. Assets could include your home, vehicle, and household goods. However, it also includes investments, such as any additional properties you’ve bought.
In some cases, the ATO will consider assets, such as your home, as both reasonable and essential to your life. However, if you have investment properties that you could sell to clear your debt, the ATO may refuse to offer relief.
Furthermore, if the ATO discovers that you’ve purchased assets while knowing you had a tax debt, it will consider these purchases as unreasonable. As such, it may reclaim those assets to repay your debt ahead of offering you tax debt relief.
Other Factors
Beyond these major factors, the ATO will also look into your personal financial history. They will want to see if you’ve complied with taxation issues in the past. Plus, they will make a judgement on whether your current circumstances, particularly related to your income, are likely to be temporary. If they are, the ATO may refuse your application for tax debt relief.
Other factors the ATO considers include how you spent your money when you weren’t considering your tax debts and if you have other debts that you need to repay. The ATO will assess your obligations to other creditors and how these impact your overall financial position.
If you do not receive relief and cannot manage your debts, there is a risk of legal action by the ATO, which could result in bankruptcy or, for businesses, the appointment of a voluntary administrator.
What Should You Do Before You Apply?
Before applying for tax debt relief, you need to ensure that all of your documentation is in order. This means you must file any overdue tax documents with the ATO so that they have a record of your tax debt. It is crucial to provide accurate details in all documentation to avoid delays or issues with your application. Respond promptly to any letter from the ATO regarding outstanding debts, as official correspondence often requires timely action.
You must also declare any unresolved disputes you have with the ATO. In most cases, these disputes must reach a resolution before you’re able to apply for tax debt relief.
Finally, you must ensure all contact data you provide is accurate and up-to-date, including your phone number, so the ATO can reach you if needed. If the ATO can’t get in touch with you, they may refuse your application without your knowledge.
Director Penalty: What Company Directors Need to Know
If you are a company director, managing your company’s tax and super obligations is not just good business practice—it’s a legal requirement. When a company is unable to pay its tax debts, the Australian Taxation Office (ATO) can hold directors personally liable for certain unpaid amounts through what’s known as a Director Penalty Notice (DPN). This means that if your company fails to pay its tax or super obligations, you could be personally responsible for the debt owed, including penalties and interest charges.
A director penalty can apply to unpaid PAYG withholding tax, Superannuation Guarantee Charge, and other tax debts. Once the ATO issues a DPN, directors have limited time to act—either by paying the debt, negotiating a payment plan, or placing the company into voluntary administration or liquidation. Ignoring a DPN can result in the ATO taking recovery action against your personal assets.
If your company is experiencing financial difficulty and is unable to pay its tax debts, it’s crucial to act quickly. Seeking professional advice can help you understand your options, such as negotiating a payment plan with the ATO or considering voluntary administration to protect both the company and your personal interests. Proactive management of tax and super obligations can reduce your risk of becoming personally liable and help you navigate the complexities of director penalties.
Seeking Professional Advice: When and Why to Get Help
Managing tax debt can be overwhelming, especially for small businesses and sole traders who may not have dedicated financial teams. The ATO offers a range of payment options and assistance programs, but understanding which solution is best for your situation can be challenging. This is where seeking professional advice becomes invaluable.
A registered tax agent or financial advisor can help you assess your tax debt, negotiate a payment plan with the ATO, and explore options to reduce interest charges and penalties. They can also assist with preparing and lodging your tax returns, ensuring you meet all your tax obligations and avoid further debt. For businesses facing serious hardship, a professional advisor can help you request debt forgiveness or a write-off in limited circumstances.
Professional advisors are also equipped to represent you in dealings with the ATO, helping you manage communications and resolve disputes. If you disagree with an ATO decision, they can guide you through the process of requesting a review or seeking assistance from the Taxation Ombudsman. By working with an expert, you can better manage your tax debt, protect your business operations, and regain control of your financial future.
Whether you’re a sole trader, a small business owner, or an individual struggling with tax debt, getting the right advice early can make a significant difference in your ability to pay your tax and move forward with confidence.
You Have Options
Having a personal tax debt can be a harrowing experience that can affect every aspect of your life.
However, with tax debt relief, you have an option that could relieve the burden and leave you free to continue your life. The information provided here should help you determine if you’re able to apply for it.
But what if you’re a business owner and your company is dealing with a tax issue?
Unfortunately, the ATO is not as lenient in these circumstances.
If your company cannot pay its debts, a wind up action may be initiated. This legal action can result in the appointment of a liquidator, who will sell the company’s assets. The liquidator will then distribute the resulting funds to the company’s creditors, including the ATO and other creditors. If the company’s assets are insufficient to pay all debts, bankruptcy or further legal action may follow. Creditors play a key role in the liquidation process, as they are entitled to receive payment from the distribution of assets.
However, you still have options thanks to Unsecured Finance Australia.
With our help, you can get an unsecured business loan that you can use to cover your tax debt while gaining more favourable terms.
The application process only takes a few minutes and you’ll receive approval within 24 hours if you qualify.
To find out more, check out our unsecured business loans today.
