Falling behind on your business’s taxes can be stressful, so it’s important to understand the consequences and the steps you can take to resolve the issue.
The Australian Taxation Office (ATO) has various measures to help businesses manage their tax debts. The longer you delay addressing your debt, the more severe the repercussions become.
Immediate consequences
If you don’t lodge your tax return by the due date, the ATO can impose a failure to lodge (FTL) penalty. This is calculated based on the size of your business and the length of the delay. FTL penalties can apply to various types of tax returns and reports, including:
- Activity statements
- Tax returns
- FBT returns
- PAYG withholding annual reports
- Single Touch Payroll reports
- Annual GST returns and information reports
- Taxable payment annual reports
The ATO may also apply a general interest charge (GIC) to unpaid tax liabilities. This is calculated daily on a compounding basis.
Debt collection
If your business’s tax debt remains outstanding, the ATO has several methods to collect the money owed.
Payment plan: If you engage early enough, you may be able to arrange a payment plan to pay off the debt in instalments.
Director penalty notice: If your business is structured as a company, the ATO may hold the directors personally responsible for unpaid taxes. This is known as a director penalty notice (DPN) and means the director becomes personally responsible for unpaid PAYG withholding, GST or superannuation payments.
Garnishee notice: The ATO can issue a garnishee notice to a business that holds money for you. This requires them to pay your tax debt directly to the ATO. Garnishee notices can be issued to your business’s bank or other financial institution, trade debtors or suppliers of your merchant card facilities.
Credit rating notice: If you have overdue tax debts and meet certain criteria, the ATO may report your tax debt to registered credit reporting bureaus (CRBs). This can affect your business’s ability to secure loans.
Legal action: In some cases, the ATO may take legal action to recover outstanding tax and super debts. The action they take will depend on your company structure. The ATO may file a summons in court, issue you with a bankruptcy notice or initiate wind-up action to liquidate your business.
What to do if you fall behind on your taxes
If your business has an unpaid debt with the ATO, your first step should be to contact the ATO as soon as possible. Explain your situation and be honest about your financial difficulties. The ATO is more likely to work with you if you are proactive and transparent.
Consult with a tax accountant who can help you understand your options and develop a plan to address the tax debt. They can also negotiate with the ATO on your behalf and ensure you comply with all legal requirements.
Along with your accountant, take a close look at your business’s finances to understand the extent of the tax debt and your ability to repay it. If cash flow issues are causing tax debt, you could consider refinancing, restructuring your expenses or seeking external funding.
When sorting out your tax debt, make it a priority. Acting quickly can prevent any further penalties, interest and legal action. Remember, seeking professional help from a tax adviser or accountant can be helpful, especially in complex situations.