A knock on the door from a debt collector is a common theme in Hollywood movies, but it is becoming a stark reality in Australia as our tax advisor, Alan Leung, confirms. GPs can inadvertently slip into a tax debt situation but there are some sure fire ways to avoid the hassle of getting it wrong. This article looks at some practical ways to manage a tax debt or potential tax debt.
I recently attended an Australian Taxation Office (ATO) Tax Practitioner’s Forum where a Director from the ATO outlined their approach to the collection of tax debts. Just the night before the Forum, the ABC Four Corners program detailed an ABC-Fairfax joint investigation on recent approach by the ATO on collecting overdue tax debts. The report has triggered the Federal Government launching an investigation into claims the ATO has unfairly treated small businesses over the collection of tax debts. It also prompts warnings from tax lawyers, accountants, watchdogs, academics and peak bodies the needs of checks and balances to ensure the ATO’s powers are not abused.
The report serves as a stark reminder the extraordinary power the ATO has over taxpayers. Setting aside the argument that the ATO has a duty to collect revenue for the Government and the effect of such often considered heavy-handed approach has on ordinary taxpayers (including many small businesses and individuals). Apart from reminder phone calls, SMS messages and letters, the Four Corners programs also highlighted the increasing tendency of the ATO referring overdue tax debts to debt collection agencies. The ATO is also issuing Garnishee Notices (a letter normally issued to a person or business that holds money for the taxpayer in the future (eg their employer, bank or even their suppliers and customers) and requires them to pay money directly to the ATO to repay the tax debt). Other tools at the ATO’s disposal include Directors’ Penalty Notice, filing summons with the courts, issuing a bankruptcy notice etc.
For most GPs, a tax debt usually arises from one or more of the following tax obligations:
- Goods and Services Tax (GST) – usually arises from the provision of non-medical services eg when subcontracting by a clinic, receipt of a lump sum payment etc
- Pay-as-you-go instalments (PAYG) – a prepayment of income tax, often quarterly and before a tax return is lodged
- Final income tax liability – following the lodgment of an income tax return
Make sure you understand that the GST you collect (eg if you subcontract by a clinic) is not your money and you need to remit it to the ATO as part of your business activity statement reporting – usually quarterly. If you could, put the GST you collect in a separate bank account so that the money is available when you need to pay the tax.
Consider using the “Instalment Rate Method” to work out your PAYG instalment payable so that you can more accurately align the tax to your income level. Regularly review the instalment rate to ensure it reflects your expected annual income. If your income is increasing, estimate your tax liability and set aside the additional tax required so it will be available when due.
Final income tax liabilities
We suggest you aim to have your annual tax return completed soon after the end of the financial year (even if it is not due for lodgment until later in the year). If you are due for a tax refund, lodge the return early and you will get paid early. If you have additional tax payable, talk to your tax adviser and work out your cash flow plan and how the timing of lodging your tax return may impact on the due date of the final tax and ongoing PAYG instalment obligations.
If you end up having a tax debt you cannot pay immediately
Engage with the ATO before the due date seeking a payment arrangement. When engaged early, the ATO is quite receptive and prepared to grant a payment plan, particularly if you can offer a lump sum upfront payment, followed by smaller regular payments. Of course the ATO may charge you interest for paying the tax over time but it would still be more pleasant than getting a phone call from a debt collector.
Disclaimer: The comments above have been prepared for informational and general purposes only and are not intended to provide, or should be relied upon for tax, legal or financial, or accounting advice. You should consult your own tax, legal, financial or accounting advisors before engaging in any transaction or making a claim on a tax return.
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