Making a deal with the ATO for your tax debt

If you owe a large tax debt you might be wondering if you can ‘cut a deal’ with the ATO. I’ve had this conversation with many clients over the years.

‘If the ATO gets rid of the interest and penalties, I can pay the balance in one lump sum’

Or:

‘Wouldn’t the ATO prefer to get something rather than nothing?’

Well, I can tell you this – the ATO will not negotiate a tax debt on a commercial basis.

You can’t simply say ‘I can pay you 80% of my tax debt right now, otherwise you can chase me for years’ and expect the ATO to accept this. It isn’t allowed to make a deal like this.

The ATO can only do what Parliament allows it to do. And Parliament does not allow the ATO to do commercial deals. If you want to cut a deal with the ATO, you need to do it within the bounds of the tax laws and rules.

What does this mean?

It means you need to find the parts of the tax laws and rules that may help you to reduce your tax debt, and see if they apply to your situation.

Here are four ways you may be able to reduce your tax debt.

Check the ATO’s numbers

You should look at whether you agree with the way the tax debt is calculated. There may be parts of your tax debt that you can object to, in an effort to reduce the overall debt.

This strategy is often useful where some of the tax debt has been raised as a result of an audit or a default assessment. For example:

  • are there deductions to which you are entitled that weren’t included in your tax assessment?
  • did you pay superannuation to employees but it wasn’t taken into account when the ATO did a superannuation audit?

You should also look for any double-counting. This is important where the ATO made estimates and you later lodged your activity statement with the right figures. You may find that your tax debt includes both the estimated amounts in the ATO’s assessment and the correct amounts in your returns. This can happen when the ATO doesn’t reverse the estimates after you have lodged. I’ve seen this happen more than once.

If you’re concerned that your tax debt is more than it should be, then having it reviewed by someone who knows what they’re doing can be well worth it.

If you do identify any mistakes in the ATO’s numbers, then the best way to address this is usually an objection.

Request a remission

You can also look at reducing your debt by requesting a remission of the general interest charge and/or penalties.

These applications are not straightforward, and I recommend you take care and seek the advice of a professional when making a request. If you make a request and the ATO says no, then you are not able to object to this decision. You can only object to certain types of tax decisions – and a decision not to remit a general interest charge is not one of them.

Getting the assistance of a tax lawyer who specialises in interest remission requests will put you in the best position for success.

Apply for a release of your tax debt

Individuals can be released from certain tax debts, such as income tax debt. You cannot be released from GST, PAYG withholding or superannuation for your staff. A company or a partnership cannot be released from any tax debt.

A release of tax debt is only possible where you would suffer serious financial hardship if you had to pay the tax.

There are many factors that the ATO will consider before releasing you from any tax, such as:

  • whether you have bought investments or spent your money without giving consideration to your tax debt
  • whether you have other debts (such as credit cards and personal loans), and you would still be in hardship because of those debts even if the ATO granted you a release
  • where your serious hardship is likely only to be short term

To be considered for this, you can lodge an Application for Release.

Make an offer of compromise of your tax debt

The ATO can compromise tax debts in very limited circumstances. There is a 17-page practice statement about this on the ATO website.

In short, there are very stringent requirements to be met before the ATO will compromise on a tax debt. These include:

  • the debt must not be disputed
  • you must be up to date with all of your tax lodgments
  • the arrangement must have benefits for the ATO. For example, a saving in the cost of collection, or collection of a larger amount than the ATO could otherwise recover
  • the amount you offer to pay as compromise cannot be for less than your total net assets
  • the ATO cannot agree to a compromise where the only reason to support the proposal is that you would suffer hardship if you had to pay your tax debt

It is expected that you look at all other available options before a compromise will be considered.

The ATO only receives a relatively small number of offers of compromise each year (around 30 per year, according to my research). This is because the criteria are so strict and the application process quite in-depth.

Approaching the ATO

If you’re struggling with a tax debt, I recommend having an expert review your tax position. They can identify aspects of your debt that may be challenged and help you to approach the ATO in the right way.

About Hartigan Law

I am a specialist tax disputes lawyer with over a decade of experience in dealing 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 call me on either 0486 041 442 or 1300 75 84 84 or email me at catriona@hartiganlaw.com.au.

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