I first spoke to Theresa in March 2017.
She was running a business through a company, which she had taken over a few years earlier. She had been a manager of the business before she took over the company.
The company had a pretty big tax debt, which was largely due to some issues with an old accountant. The accountant had made some mistakes which caused the company to be audited. He then hid the audit from Theresa and the company director at the time. They didn’t find out about the audit until it was over and the ATO had made its decision.
The result of the audit was that the company had a large tax debt, which included administrative penalties. The accountant did not fully explain the consequences of the audit to the director. He just told the company that it now had a tax debt that it needed to pay. Shortly after that, his services were terminated and the company found a new accountant.
I’m not saying all accountants are like this. Far from it. But, it is very important to know that at the end of the day, if things go wrong, it is not the accountant who is on the hook for the extra tax debt and penalties. It’s you.
This means that you need to pay attention to what is happening with your returns.
Make sure the accountant is having you sign BAS and tax returns before lodging them. Ask questions. Make sure you understand the figures.
Don’t leave it all up to the accountant – if they mess up, it’s on you.
Theresa worked very hard to turn things around and sort out the tax debt. She faced a lot of challenges – her business became the target of a vicious smear campaign within the local community which was aimed at the previous owners. She became unwell and had to step away from running the business for a while. Things just weren’t going her way. But she kept fighting and chipping away at the company’s tax debt.
When Theresa called me, the company’s tax debt was up to around $235,000. A lot of this was general interest charges and failure to lodge penalties. There were also some administrative penalties that arose during the audit that had happened years before.
Because of these extra interest charges and penalties, Theresa was having real trouble dealing with the tax debt. She wanted to sort it out. She knew she could pay back the tax debt and run a successful company – she just needed some help.
Application for remission of interest
The first thing I suggested to Theresa was that we asked the ATO to remit the general interest charges and failure to lodge penalties. If we were able to do that successfully, then the tax debt could be brought down to a manageable amount – and she could arrange a payment plan that would allow her to pay the tax debt over time.
Without the amounts being remitted, she wouldn’t have been able to pay the debt soon enough for the ATO to allow a payment plan (generally, this is 2 years, but in some cases, it can go up to 3 years).
I asked Theresa to send me details of the company’s historic tax debt, so that I could look over it. You’d be surprised how much I can learn just by looking at the numbers.
We then scheduled a phone call. I’m based in Adelaide and her business was in a rural city interstate, but we were able to do everything over the phone and email.
This first call went for two hours. I asked a lot of questions – this is really important. I had to know everything that had happened since the tax debt started building. I asked her about her health, her relationships, the managers of her business, her clients … everything.
After our call, I sent Theresa an email, listing the further information and documents that she was going to follow up for me. This was her to-do list.
I then got to work on a first draft of a letter to the ATO, explaining why the company was a good candidate for a remission of interest and failure to lodge penalties.
I usually do a few drafts of this kind of letter. It can be difficult to distill years of events into an easy to follow letter, so it takes time. It’s also important to make sure that the letter addresses the key things that the ATO should take into account when considering a remission of interest and penalties.
Once I was happy with the draft and had received the extra information from Theresa, I sent her a copy of the letter to make sure everything was correct. We discussed it to make sure I had captured all the key issues.
When it was finished, I sent it to the ATO and included supporting documents so that the ATO could understand exactly what had happened in the past.
It took the ATO about 7 weeks to process the request. This is a bit longer than it should take – but it tends to happen where there are larger amounts of interest to be considered.
The ATO agreed to remit all of the GIC and failure to lodge penalties. This was over $70,000! Theresa was thrilled.
But it didn’t end there.
The administrative penalties
When the company had been audited several years ago, the ATO had decided to impose administrative penalties of almost $30,000. These are dealt with differently to failure to lodge penalties, so we needed to treat them separately.
The administrative penalties were charged because the ATO found that the figures reported in the BAS were less than they should have been. The company had not reported or paid enough PAYG withholding for its staff. In some cases, the accountant had reported that the company had only withheld $1 in PAYGW for a quarter. This was definitely wrong!
Because of this finding, the ATO imposed administrative penalties for some of the tax periods. For some periods, it was a penalty of 25% of the tax shortfall – this is the penalty that applies for ‘failure to take reasonable care’. For other periods, it was 50% – for ‘recklessness’.
In my early calls with Theresa, I asked about this audit. She said that the accountant had communicated with the ATO for the full audit and didn’t even tell the director about it until after the audit was over. She also explained how the mistakes had happened. It seemed like these mistakes were the accountant’s mistakes, not the company’s.
She said that the accountant had, at times, simply guessed the amounts and lodged returns with the ATO. He said that he did this because he didn’t want the BAS to be late and he intended to go back and fix it up later.
I asked Theresa to send me a copy of the audit results letter so I could investigate it further.
The first thing I noticed was that, in the letter, the ATO said that it was charging a penalty of about $30,000, but that it had decided to remit about $5,000 of this. This was good – but when I looked at the numbers, I found that the ATO had never processed this remission. They’d charged the company the full amount! I knew I could fix that.
Based on what Theresa had told me, I also thought we may have some chance to get the full penalty remitted.
To do this, we had to lodge an objection to the ATO. Though it was technically too late for the company to lodge an objection, I was able to get an extension from the ATO.
I submitted an objection with as much detail as possible. Unfortunately, because of how much time had passed, Theresa did not have the full evidence to prove that the accountant caused the problems. For example, though Theresa knew she had emailed the accountant with the correct figures for how much PAYG had been withheld, the company didn’t have copies of these emails anymore.
Without this evidence, the ATO said it could not further remit the penalties. It couldn’t just rely on our statements that the accountant had been given the right information and still lodged the wrong figures with the ATO. If we could provide evidence, things would be different.
Even though we didn’t ‘win’, I did manage to get the ATO to process the $5,000 remission that it should have processed years ago. This was better than nothing (and more than covered my fees!).
Lessons you can learn
Theresa’s company is doing well since I worked with her and it is keeping on top of its tax debt. The remission of a total of around $75,000 in fees and penalties has really helped.
There were also a couple of good lessons that came from the experience:
- Always double check that the ATO does what it says it will do – this is not the first time the ATO has agreed to remit an amount and then not actually processed it. If you have trouble understanding the ATO’s statements, then ask a tax expert to help you.
- Pay attention to what your accountant is lodging – an accountant should have you sign off on returns before they are lodged with the ATO. Make sure these numbers make sense to you. If things turn out to be wrong, it will be you who gets punished – not the accountant.