There are no hard and fast rules as to what the Australian Taxation Office (“ATO”) will consider to be acceptable for a payment. This is because their policies generally refine with time.
Prior to undertaking any payment arrangement, it is important to ensure that whatever is proposed is sustainable for your business. For smaller amounts, the ATO often allows the payments to run through automatically. Once the amounts increase, however, they will actually look at your financial information and ensure that you are able to make payments or that the business is sustainable.
Let’s say that you’ve put forward a payment arrangement for outstanding debts, but it has been rejected. Why has this occurred?
Are your BAS’s up to date?
Do you have outstanding lodgements? Simply, if your Business Activity Statement’s (“BAS”) are late, then there is no ability for the ATO to commence a payment arrangement until these are up to date. The worse the lodgement, the harder this is.
During the time that you are catching things up, it is important to be making payments. While you will not have a formal arrangement, you can be in an informal arrangement if your lodgements are up to date. This is not an open-ended mechanism and is usually limited to a month to six weeks.
The ATO has looked at your financial performance and deemed that you are unable to afford the payments. This occurs for businesses with large liabilities or where there are lots of lodgements to catch up.
What this means is that the ATO believes that you have no ability to comply with the payment arrangement. It may be due to profitability, cash flow or unrealistic profit or trading expectations. If you have been unprofitable for last two years but claim a profit for the coming year they will ask for it to be explained or rationalised.
For many businesses, this is the time to look at their overall operations and see if there is a need to restructure or change track. While the ATO analysis is simplistic and rudimentary, the ATO’s determination is usually close to the mark as to whether the business can survive in their current form.
The ATO’s tolerance for businesses with ongoing failed payment arrangements has significantly declined. There is no guarantee that they will accept an arrangement. The poorer your compliance history, the less likely they will give you latitude to have a payment arrangement, and may even require security in order to allow you to have a payment arrangement.
Put simply, if your returns are late or not lodged then you are not going to be getting a payment arrangement. Although, keep in mind, that this does not need mean that you can’t start to make payments under a payment arrangement that you think will be acceptable.
What about penalties and interest?
Asking for a waiving of penalties and interest while the debt is on foot is difficult, but once the payment arrangement is in place and you are making payments they will look at the remission of penalties and a reduced interest charge. Making calculations on the basis that the penalties will be remitted is not prudent as it is generally accepted that the debts will be paid in full before a remission is considered.
What is generally acceptable?
A horrible answer, but… it all depends.
A good answer is that it will be based on the level of debt, your compliance history and what is affordable. There are no explicit rules to this but there are some guidelines you should expect.
An ideal arrangement is six months, acceptable is twelve to eighteen months and it is often practical to push it as far as twenty four months. On rare occasions we see past two years but there has to be a compelling business case and generally the Commissioner will want to take some form of security.
Will the ATO reduce my primary debt?
There are very few cases where the ATO will consider reducing the primary debt and there needs to be a extreme circumstance where this will apply. Severe drought and death of a business partner are two examples, of late we have seen where the tax agent fraudulently misappropriated tax payments was insufficient for the ATO to reduce the primary debt. It is very unlikely that you will receive a reduction of the primary tax, and businesses that promise they can help you with this are unlikely to be successful.
So my arrangement is accepted, now what?
You have jumped over the first hurdle but from here your business needs to be analysed. There really needs to be a review of what caused the initial problem understanding if there are wider problems in your business. We recommend that, once your lodgements are up to date and you’re making the payments, you look at your business and see if changes can be made to ensure that your business is working the best it can.
What if I miss a payment?
Communication is the key, as most arrangements come to an end if you miss a payment. You can, however, manage this if you communicate with the Commissioner and explain the situation. If you don’t communicate you will be in trouble and there is a risk that the Commissioner will institute formal collection processes, this is something that you want to avoid.
If you do look like missing a payment you need to be asking what the reason for this is, is the business having financial difficulties, are clients not paying or are your budgets out of whack. If you are facing this, it is important to get on top of the reason that has caused late or missing payments and make sure that it is not repeated.
What if my offer is rejected?
This can be a problem for businesses and depending upon the position of the ATO may commence collections proceedings. It is important during this time to communicate with the ATO, and wherever possible be making some form of payments. It is also important to get advice at this time, as your options will run out quickly.
We suggest that one thing you do is not borrow money from short term sources to cover the debt. In a transaction late last year, our clients were recommended a short term facility at 1% per week with a default rate of 4% per week. A quick back of the envelope would have resulted in them going broke in March and losing their house, as opposed to not borrowing the money and being able to strike a deal with the mortgagee to advance a small amount to deal with the ATO.
Is all hope lost?
Things aren’t great but there are active steps that you can take to deal with the ATO. This may be an informal arrangement, making regular payments and getting your compliance up to date, this can, often ensure that they will not take recovery steps. Equally, restructuring your business and assisting the business to survive in a more robust fashion may also be an option.
Facing up to the reality of the situation is necessary, whatever steps need to be taken are definite and no simple cookie cutter solution may be sufficient to get you through. Everything isn’t lost but getting help is something that most businesses will need.
If you’re liabilities are under control with the ATO, have you done this to the detriment of the balance of the business? Take the time to talk to your bookkeeper or accountant and make sure that you are in control of your financial situation.