How does the ATO collect tax debts?

Remember when you were young and you would ask your parents why you had to do something? Was their typical response ‘because I said so’?

Well, tax debts are a little bit like that. If the ATO tell you that you owe them an amount, then guess what? You owe them the amount, ‘because they said so‘ (or, because the law says so).

This means that if the ATO sends you an assessment, and you don’t pay the amount by the due date, they can start debt recovery action against you straight away – even if you don’t agree that you have to pay the tax. There is some scope to defer the debt recovery – but this usually involves you giving the ATO security for the amount, or paying half of what they say you owe.

So, what sort of things can the ATO do to collect their money, once they’ve said that you owe it?

Having a chat about the tax debt

Generally, the first step that the ATO will take is to phone you or write to you about the debt. They may do this directly, or through a debt collection agency.

They will want to know when you will pay the debt, and will generally be open to discussing a payment plan with you to give you some time to pay the debt. Whether a payment plan is successful will depend on a number of things, including the amount of the debt, your income, your expenses, your assets and your liabilities.

If you are successful in negotiating a payment plan, then the ATO will leave the matter there, as long as you make payments on time and comply with all future tax obligations. If you don’t comply with the terms of the payment plan, then the matter will most likely be escalated through one of the following steps.

Garnishee Notice

If the ATO doesn’t get anywhere with their version of ‘playing nice’, then they will probably issue a garnishee notice to anyone who holds money on your behalf. This doesn’t just mean your bank – garnishee notices are commonly issued to:

  • employers – the ATO has a general policy not to take more than 30% of your salary or wages when you do not have any other source of income
  • trade debtors – if you run a business, the ATO can go after your customers, requiring them to pay the ATO directly. Not only does this affect your cash flow, but also your reputation
  • asset buyers – if you’ve sold an asset, such as a house, the ATO can require the buyer to pay them first

The person holding your money does not need your permission to pay your funds to the ATO – in fact, it’s a crime for them not to comply with the ATO’s notice.

The ability to issue these notices is a pretty big stick that the ATO can wield, and the threat of a garnishee notice is usually enough to coerce you into finding another way to pay, or defer, the tax debt.

Director Penalty Notice

Where a company doesn’t pay its liabilities for pay as you go (PAYG) withholding, or its superannuation guarantee charge (SCG) by the due date, the directors of that company automatically become liable for a penalty that is equal to the amount the company should have paid.

These director penalty notices are used to encourage the director to make the company comply with its tax obligations, or put the company into external administration if it can’t pay its debts.

If the penalty is not paid to the ATO, then it can then take legal action to force the director to pay it.

In some circumstances, the ATO will remit the penalty, so that it either does not need to be paid, or it is refunded if:

  • the company pays the outstanding amount to the ATO
  • the company goes into voluntary administration or liquidation within 21 days of the director penalty notice being issued, and the company reports its PAYG and SCG liabilities within three months of them falling due.

There are also some limited circumstances in which you may have a defence against the director penalty notice.

Director penalty notices are serious, and you need to act quickly if you receive one. I can help you work out whether you have a defence and what steps you should take in response to a notice.

Take you to court

If the ATO doesn’t feel like they’re getting anywhere with recovering the tax debt, they can take you to court. The first step is to have the court recognise that a debt is owed – this is almost a ‘rubber stamping’ process, because as I said above, the law says that you owe tax simply because ‘the ATO says so’.

Even if you are disputing the tax debt, the law allows the ATO to take you to court and get a judgment in its favour for the full amount. You don’t get the opportunity to explain the underlying issues and arguments to the judge – the law says that those are irrelevant to the recovery of the debt.

This is why it’s important to co-operate with the ATO, and use reason and common sense as your tools to defer legal action (because the law won’t help you).

Of course, you will get a refund of any amount collected from you if it turns out that the tax debt was incorrect, plus a small amount of interest.

Statutory demand for the tax debt

If the taxpayer is a company, the ATO can issue a statutory demand, requiring payment within 21 days. If the amount isn’t paid, then the company is presumed to be insolvent, allowing the ATO to apply to the Court to wind up the company.

Winding up or bankruptcy

If the court makes a judgment against you for the tax debt, or you don’t pay the amount demanded in a statutory demand, then the ATO can make you bankrupt, or wind up a company that owes it money. This is a serious consequence, and generally one that can be avoided if you play your cards right and deal with the ATO in the right way.

However, if there is a genuine dispute as to whether the amount of tax is due, then the ATO should not take these steps; they should agree to defer the legal recovery until the dispute is resolved one way or another.


Related Articles


About Hartigan Law

I am a specialist tax disputes lawyer with over a decade of experience in dealing with the ATO.

I’ve helped many clients to deal with their tax debt, even after the ATO has started debt collection processes. I have helped clients to avoid bankruptcy by reducing their tax debt and successfully negotiating payment plans with the ATO.

I work with clients all over Australia. I can do this because the tax issues I deal with are Federal – the tax law is the same no matter where in Australia you live.

You can contact me on 1300 75 84 84 or at catriona@hartiganlaw.com.au.