The ATO can issue a ‘Notice of estimate of liability’ (or an ‘Estimate Notice‘) if it believes that you have overdue:
- pay as you go (PAYG) withholding amounts; or
- superannuation guarantee charge (SGC) that has not been assessed.
An Estimate Notice is a formal notice that the ATO can issue under section 268-15 of Schedule 1 to the Taxation Administration Act 1953.
The ATO has a similar power in relation to income tax, under which it can issue a default assessment if you have not lodged your income tax return.
When the ATO issues Estimate Notices
The ATO can use its power to estimate PAYG withholding and SGC liabilities in many situations.
Example 1 – An Uncooperative Business Owner
The ATO may issue an Estimate Notice when it has tried to audit a business but has not received help from the business owner.
Example 2 – Suspected phoenix activity
Another common situation in which the ATO will use estimates is where it considers there to be phoenix activity. That is, if the ATO believes that:
- the same people operate the same business through a string of entities, and
- each entity is shut down without paying its tax obligations (including PAYG withholding and SGC). The business is transferred to a new entity and the cycle repeats.
In this situation, the ATO can estimate the unpaid tax liabilities. This will allow it to create the debt under law, so that it can start pursuing the debt (e.g. through the courts).
How the ATO estimates liability
There is no prescribed process for how the ATO comes up with its estimate. It can take into account anything it wants. For example:
- it is likely the ATO will look at your past PAYG withholding amounts or superannuation payments.
- the ATO can access your bank records to see what you have paid to staff and treat these amounts as after-tax wages
- the ATO could speak to your employees about the amounts they have received
The only restriction on the estimate of the liability is that it must be reasonable.
The administrative penalty that applies to an estimated liability
If the ATO issues you with an Estimate Notice, you will also be charged an administrative penalty that is equal to 75% of your primary tax liability.
This penalty is charged under subsection 284-75(3) of Schedule 1 to the Taxation Administration Act 1953. It can be increased by 20% if you have previously received an Estimate Notice, or if you receive an Estimate Notice in relation to multiple tax periods at once.
You receive the following Estimate Notices from the ATO for PAYG withholding amounts:
- the June 2015 quarter: $4,000
- the September 2015 quarter: $4,000
Your penalties will be:
- the June 2015 quarter: $3,000 (being 75% of the primary tax)
- the September 2015 quarter: $3,600 (being 90% of the primary tax)
The reason the penalty for the September 2015 quarter is higher is because the ATO increases the 75% penalty by 20%. It does this because it is the second time that it has imposed a penalty on an estimated amount.
Note: the 20% increase applies to the penalty percentage. That is, 20% of a 75% penalty equals 15%. This 15% is added to the 75% penalty. This means the total increased penalty is 90% of the underlying tax debt.
It may be possible to have this amount remitted, if you can show the ATO good reason why you did not lodge the necessary returns yourself.
The debt becomes due when the Estimate Notice is issued
Once the ATO has issued you with an Estimate Notice, you are liable to pay the estimated amount. The amount in the notice is now a tax debt that is due and payable to the ATO.
This means that the ATO can start debt recovery action for this amount. For example, it can:
- serve you with a summons (if you are an individual)
- issue a Statutory Demand (if you are a company)
- issue a garnishee notice to your bank or anyone else who holds money for you
The ATO has the power to take recovery action even if you believe that the amount that it has estimated is inaccurate.
The ATO can serve a DPN for an estimated liability
The ATO can use a Director’s Penalty Notice to make a director liable for any unpaid PAYG withholding liabilities of a company.
If a company hasn’t reported its PAYG withholding liabilities and/or SGC to the ATO, then the ATO can issue an Estimate Notice to the company. It can also issue a DPN to the directors for the amount covered in the Estimate Notice. If certain steps aren’t taken, then the ATO can pursue that director personally for these amounts.
This is a strategy that the ATO has employed for dealing with suspected Phoenix arrangements.
The general interest charge applies to an estimated liability
The general interest charge (GIC) can apply to an estimated PAYG withholding amount liability, but not to an estimated SGC amount.
The GIC is calculated from the date on which the underlying tax liability was due – which can be quite some time before the Estimate Notice was sent.
On 28 August 2017, the ATO issues you with an Estimate Notice for PAYG withholding amounts for the June 2015 quarter.
Your due date for the payment of the PAYG withholding amounts for that quarter was 28 July 2015.
This GIC is applied from 29 July 2015, because your payment has been overdue since that date. This is even though the Estimate Notice wasn’t issued for another 2 years.
What to do when you receive an Estimate Notice from the ATO
When you receive an Estimate Notice, you should also receive a template statutory declaration. You must complete this declaration if you want the ATO to reduce or revoke any of the estimates.
The statutory declaration should set out the actual amount of the liability. If there were no amounts that should have been withheld or paid, this should be stated in the declaration.
The tax law lists some very specific information that a statutory declaration must include. It is important to get advice from a tax expert before submitting the declaration.
You should return the statutory declaration to the ATO within 7 days. The ATO may allow an extension – but it is best to act quickly and not assume that the ATO will give you an extension.
The ATO will reduce or revoke the estimate in accordance with the statements in the statutory declaration if it:
- receives the statutory declaration in time; and
- accepts the claims made in the declaration.
A statutory declaration is a formal legal document and there are significant consequences for making a false or misleading declaration.
Firstly, the ATO will not accept a false or misleading declaration and it will have no effect to reduce or revoke the ATO’s estimate of liability.
Secondly, you may be prosecuted for making a false statement. If you are convicted, you could be fined or jailed (or both).
If you don’t submit a statutory declaration and the ATO proceeds to debt recovery proceedings based on the estimate, you can defend those proceedings by filing an affidavit about the correct amount of tax liability. Once again, there are particular requirements about what should be in this affidavit. You should have a tax dispute expert help you to prepare this.
A note about unpaid superannuation
The ATO can issue a SGC default assessment instead of an Estimate Notice. This works in a similar way. That is, you will be liable to pay the amount in the default assessment straight away and penalties will apply.
About Hartigan Law
I am a specialist tax disputes lawyer with over a decade of experience in dealing with the ATO.
I have helped many clients to respond to ATO audit activity and to negotiate reductions in penalties and interest charged as a result of Estimate Notices.
I work with clients all over Australia and internationally. I can do this because the tax issues I deal with are Federal – if you’re dealing with the ATO, then I can help.