Laura’s story – default assessments and huge penalties charged by the ATO

In March 2018, Laura contacted me via the Hartigan Law website. She said that she had an income tax issue that was spiralling out of control, and wanted to speak to a lawyer about what she could do.

I called Laura on the number she left. We spoke on the phone for about 15 minutes and she explained her situation.

She had not lodged her tax returns for quite some time. She knew this was a problem and so, in late 2017, she had gone to an accountant to help her to get up to date. It took about 5 months before her tax returns were lodged.

She then received a letter from the ATO which said ‘your amendment request has been disallowed’. The letter went on to say that ‘your returns will not be processed as we previously raised default assessments for these periods’.

Then she received a letter from a debt collector for her tax debt, which was much higher than she’d expected (almost double!).

She didn’t know what to do. She called her accountant. They said they didn’t know what happened. The accountant then called the ATO and found out that the ATO had already issued default assessments about 3 weeks before the accountant lodged the income tax returns. The ATO said that, because of this, they couldn’t process the tax returns the accountant had lodged.

What is a default assessment?

A default assessment is a tax assessment created by the ATO if you do not lodge your tax return yourself.

Usually, when the ATO issues a default assessment, it will also charge a penalty of between 75% and 90% of the assessed tax. Because of this very serious consequence, the ATO will usually send you a warning letter, encouraging you to lodge your own tax return before it issues you a default assessment.

Laura became concerned about her accountant – how did the accountant not know about the default assessments? Why had her accountant not told her that it was possible that this could happen? And what should she do now?

She wasn’t confident that the accountant was doing the right thing, which is why she contacted Hartigan Law.

After speaking to Laura for a while, I worked out that there were several steps I needed to take to help her:

  1. I needed to work out what Laura’s tax debt should be. My calculations showed that her tax should be less than what the ATO had assessed in the default assessments. This meant I had to lodge an objection to the ATO’s default assessment, so that she only paid tax on her real taxable income.
  2. I had to find out whether the ATO had sent a warning letter to Laura and what other communication was on her file. I lodged a Freedom of Information request with the ATO, which showed that the ATO had sent a warning letter – but to the wrong address.
  3. I needed to try to reduce the 75%-90% penalties that the ATO had charged Laura. This meant I had to lodge an objection to the penalties. I had to explain why Laura had not lodged her tax returns earlier and why she had not responded to the warning letter (because it was sent to the wrong address!). I had to try to convince the ATO that it was not fair to charge her these huge penalties.
  4. I had to help Laura to deal with the debt. I didn’t want the debt collectors to keep bothering Laura while I prepared the objection. I was able to arrange for her to pay a small amount each month until I had sorted out what her ‘real’ tax debt was (i.e. until the ATO had considered the objection and reduced her tax).

When the ATO considered the objection that I lodged about the tax and the penalties, it agreed that Laura owed less tax that it had calculated. The ATO also agreed that penalties of 75%-90% were unfair in Laura’s situation, and reduced the penalties to 25% of the tax.

Her tax debt was down to around half of where it started. But that wasn’t the end of the matter.

Her debt also included some failure to lodge (FTL) penalties and general interest charges (GIC). These kinds of penalties and interest weren’t dealt with by the ATO in the objection, because different processes apply to different types of tax. Once the objection decision had been made, I made an application to the ATO remit the GIC and the FTL penalties, and the ATO agreed to do so.

Laura still had a tax debt to pay. However, I was able to negotiate a payment plan that will allow her to pay it off over time, whilst still having enough money to cover her regular expenses such as rent and food.

A word from Laura:
I contacted Hartigan Law after what I thought was a simple process to get my tax returns up to date, spiralled out of control. I was completely overwhelmed and unprepared for what transpired and needed some urgent help!

I cannot thank Catriona from Hartigan Law enough for her help and advice throughout this process. Cat took immediate control of the situation, kept me up to date every step of the way and negotiated on my behalf to sort this mess out.

Cat is an amazing lawyer and I highly recommend her and Hartigan Law to anyone needing assistance with their tax nightmare!

Laura | Queensland