ATO Debt Forgiveness Guide

Debt is a prevalent issue among Australians and a common source of stress and strife. While some debts can be paid off, others can continue to accumulate, which is also quite often, and sometimes, individuals and businesses may find themselves paying off the debt.

If you find yourself in a situation where you can't pay the debt, commercial debt forgiveness rules can help. These rules, in theory, provide a solution for many.

Debt forgiveness occurs when a creditor cancels part or all of a person or business's outstanding bad debts that they cannot possibly pay through their regular means.

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ATO is one of the creditors that can forgive a debt. However, while the debt may be forgiven, tax consequences may be attached to the subsequent income and could likely harm your credit scores.

What is ATO Debt Forgiveness?

The Australian Tax Office can release a company or person from some or all of their tax debt. The rules around ATO debt forgiveness are complicated but can be broken down as follows:

• The ATO releases a person from some or all of their tax debt. The situation is restricted to when paying a tax debt would cause serious hardship or if the debt is not legally recoverable.
• The ATO can also release a company from some of its tax debt, but only penalties and interest. It does not have the power to release a company from its primary debt.
• The ATO can agree to accept less than the full amount of a company's primary tax debt but only as part of a formal insolvency procedure such as voluntary administration or small business restructuring.

Who can Apply for a Release from Tax Debt?

You can apply for release if you are an individual or the trustee of the estate of a deceased person. Companies, trusts, and partnerships cannot apply to have tax debts released.

If you're a company director, you can apply directly to the ATO to have some of the reduction in penalties and interests waived but not the primary tax debt. However, it is more common for the company's external accountant to make the application.

Understanding the Different Types of Debt Forgiveness

When applying for ATO debt forgiveness, you should know that several terms are used, such as forgiveness, release, haircut, write-off, and waiver.

Debt forgiveness occurs when the ATO agrees that some or all of your tax debt does not need to be paid. Release is the ATO term for permanently removing some or all of an individual's tax debt. There is no technical difference between forgiveness and release. Sometimes, the terms haircut or write-off are also used to refer to forgiveness.

On the other hand, a waiver is a specific term under Section 63 of the Public Governance, Performance and Accountability Act 2013, where the Finance Minister may waive amounts owing to the Commonwealth. The waiver permanently expunges a debt owed to the Commonwealth. The ATO itself does not have the power to grant a waiver, and the waivers are very rare. The vast majority of people and companies would not be granted a waiver. The minister only grants the waiver once all other available options have been considered and the minister determines it would be appropriate.

Does the ATO Forgive a Company Debt by Agreement or Negotiation?

The ATO does not have the power to forgive the primary part of a company's tax debt. You may see or hear of debt forgiveness for companies, but it only refers to one of two situations:

• The forgiveness is for penalties and interest, not the primary tax debt, so the director cannot negotiate a reduction in the primary tax debt.
• Formal agreements to forgive a tax debt by signing a formal insolvency procedure can be either by voluntary administration or small business restructuring. This is also not done by negotiation with the ATO but through formal company restructuring laws under the Corporations Act.

What are the Insolvency Procedures to Use to Get ATO Debt Forgiveness?

Several formal insolvency procedures can be used to seek ATO debt forgiveness. Each is designed for different situations. In all cases, the ATO will engage with the process and decide to accept or reject offers based on their merits.

Small business restructuring for ATO debt forgiveness

Small Business Restructuring (SBR) is a process introduced in 2021 to assist small businesses in financial difficulty. SBR allows small businesses to propose a plan to their creditors to restructure their debts while the directors remain in control of the business. It is restricted to companies with total debts under $1 million. It is cheaper and simpler than voluntary administration. The ATO supports the SBR process and has voted in favour of proposals under the SBR of 80% debt forgiveness.

Using voluntary administration for ATO debt forgiveness

Voluntary administration is a process for companies that have existed for many years. The company's directors appoint a voluntary administrator through a simple resolution. The process is usually completed in a little over a month.

Unlike in small business restructuring, there is no upper limit to the amount of debt that can be forgiven in this case. During the voluntary administration, there is a moratorium on any recovery action by creditors, including the ATO, against the company, and it stops the enforcement of personal guarantees against the company.

The ATO actively participates in the VA process and, together with other creditors, will vote for or against proposals on their merits.

Using a debt agreement for ATO debt forgiveness

Debt Agreements (DA) are simple processes under the Bankruptcy Act for individuals or persons. A person appoints a Debt Agreement Administrator to run the process and report to creditors. They are restricted to people with debts under $133,000. The process allows a debtor to offer an amount to their credit, which is what they can afford to pay over sometime, often three or four years. There are other restrictions associated with this process.

Using a personal insolvency agreement for ATO debt forgiveness

Personal Insolvency Agreements (PIA) are for individuals and are a straightforward process under the Bankruptcy Act. The individual appoints a trustee to run the process and report to creditors. There are no limits in a PIA. The process allows the debtor to offer an amount to their creditors that they can afford to pay.

Individuals and companies can get ATO debt forgiveness. However, it is important to note that the ATO can't forgive primary debt for companies. You should also know that other avenues must have been exhausted in many cases for the ATO to consider debt forgiveness.