ATO Payment Plan

Dealing with the ATO can be daunting, especially when staring at a huge tax bill that must be paid in full. Opting for an ATO payment plan is one of the first options business owners consider. However, before going down this road, you should understand as much as possible about ATO payment plans and how to get one.

What is an ATO Payment Plan?

An ATO payment plan, also called a payment arrangement, is an agreement between you and the Australian Tax Office that allows you to pay off your outstanding tax debt in instalments over an agreed period of time.

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During the payment plan, the ATO will agree not to pursue tax collection activities as long as you continue to fulfil your obligations under the agreement.

One important detail to keep in mind when considering an ATO payment plan is that a general interest charge applies. However, the interest charge is deductible. In instances where a small business has less than $50,000 in tax, you may be able to apply for an interest-free payment agreement.

If you acquire tax credits or refunds later in the agreement, these can be used to reduce your debt, but you'll still need to meet your required instalment payments. You will also need to make additional voluntary repayments or pay off the entire outstanding amount at any time you choose.

Why Do I Owe the ATO Money?

Typically, a huge ATO bill catches the business by surprise, and in other cases, the business expects the ATO bill. It's crucial to understand why you might find yourself owing money to the ATO to avoid the same situation again.

For small businesses, tax debt can accumulate for a variety of reasons, including the following:

Fluctuating cash flow

Small businesses often experience unpredictable income fluctuations. In some months, revenue may fall short of tax obligation, which can easily lead to debt accumulation.

Unexpected expenses

Running a business comes with its fair share of surprises, including unexpected, sizeable expenses such as equipment purchases, repairs, or emergency purchases. These can strain your finances and make it challenging to meet tax deadlines, gradually increasing your ATO debt.

Tax Oversights

Business tax regulations are an intricate web that can be hard to understand without professional assistance. It is easy to overlook deductions and fail to claim eligible tax credits, resulting in underpayment, only to realise this when the ATO brings it to your attention.

Economic downturns

Another reason a business can find itself with substantial ATO payments is economic downturns, which can be sudden and unexpected and particularly harsh on businesses and their profitability, making it harder for them to keep up with their tax obligations.

Whatever the reason your business is unable to keep up with its ATO obligations, it is crucial to identify it and take necessary action to ensure it doesn't recur. More importantly, you should not ignore a tax debt. It will only lead to mounting interests and penalties, so it is essential to address it proactively.

Who is Eligible for an ATO Tax Payment Plan?

Most taxpayers with an outstanding tax debt can apply for ATO payment plans. However, a criteria may apply to determine whether the ATO considers your application. These include the amount owed and your previous tax compliance history.

Benefits and Downsides of an ATO Tax Payment Plan

You can consider other alternatives before taking out an ATO payment plan. But if you have to take it, you should understand its benefits and any downsides associated with the decision.

Some of the benefits of establishing a payment plan with the ATO include:

• It allows you to manage your tax debt more effectively by breaking the total amount owed into smaller, more manageable instalments.
• Setting up a payment plan can save you from paying penalties and interest that you would otherwise face if you ignored your tax debt.
• The payment plan prevents your debt from escalating into debt recovery action.

Potential Downsides

Going for an ATO payment plan could also have downsides that must be considered before applying for the payment plan. Such downsides include:

• The ATO doesn’t usually allow interest-free payment plans. In most cases, you will pay a general interest charge.
• If you don't stick to the agreed payment plan, the ATO may take further action against you, such as garnishing your wages or taking legal action.
• Sometimes, setting up a payment plan will not resolve your other ongoing financial issues. You may need to explore other options, such as negotiating to suit your specific individual or business circumstances.

With the benefits and downsides of an ATO payment plan, you can determine if this is the best course for managing your tax debts and meeting your obligations.

How to Set Up an ATO Payment Plan

Before committing to an ATO payment plan, it is essential to bear in mind the following:

• The payment plan does not absolve you of ongoing financial responsibilities such as upcoming PAYE instalments, payroll taxes or business activity statement bills. You should not neglect these payments, or you could risk further debt accumulation.
• A history of timely payments and meeting your financial obligations will enhance your credibility with the ATO and could potentially influence the terms of your payment plan. Having multiple defaults and insufficient funds may result in less favourable conditions.
• You can also explore other debt reduction options. Tax credits, allowable expenses and refunds can also help offset your outstanding debt. But you should not think that these measures cannot substitute regular instalments. The ATO may also consider factors such as utility bills, wages and superannuation contributions when determining your repayment schedule.

You can set up a payment plan with the ATO relatively quickly and easily by following these steps:

Contact the ATO

The first step is to contact the ATO as soon as you realise you have a tax debt. The sooner you can address the issue, the better. You can contact them by phone or through other online services.

Provide your information

When contacting the ATO, you should be prepared to provide details about yourself, your financial situation, and your business if it is the subject of the debt. The required details include your income, expenses, and assets. The ATO will use this information to assess your ability to make regular payments and also whether to consider the plan.

Negotiate terms

The ATO will work with you to determine a suitable payment plan. This plan includes the amount you need to pay, the frequency of payments, and the duration of the agreement. Depending on your financial situation, you can negotiate the terms to make the plan as favourable as possible. The ATO may consider your request, but there's no assurance it will accept them. However, it’s worth giving it a try to get more favourable terms.

Stick to the Plan

Once the payment is in place, you should adhere to the agreed-upon terms. Missing payments or defaulting on the plan can lead to additional penalties and consequences.

Review and adjust where necessary

If your financial circumstances change during the payment plan, you should contact the ATO promptly to discuss adjustments. They can modify the plan to suit your current issues.

Working to set up a payment plan with the ATO can be a practical solution for managing your tax debt while maintaining the financial health of your small business.

Sole traders, individuals and businesses with debts amounting to $100,000 or less can conveniently set up payment plans online.

The payment period provided by the ATO typically spans 12 to 24 months, depending on the amount owed. In addition to the prescribed instalment, you can also opt for direct debits and voluntary payments to expedite the debt repayment process.

If you have a debt exceeding $100,000, you may need to contact the ATO directly via telephone to initiate the payment plan process.

Can You Change Your Existing Payment Plan with the ATO?

It is possible to change your existing payment plan with the ATO. Life can be unpredictable, and your financial situation may change for the better or worse. If you find yourself in such a situation and you're unable to meet the current obligations, you can contact the ATO to discuss the possibility of adjusting your payment plan. It's important to consider that your history with the instalments will factor in heavily as to whether the ATO will approve your request for an adjustment to your payment plan.

What Happens If You Miss an Instalment?

Failure to adhere to the terms of the payment plan, such as underpayment or missed instalments, can lead to default status. In such cases, the ATO may resort to debt enforcement measures, including garnishing your wages to recover the outstanding amount owed to them.

If you encounter difficulties meeting your payment obligations, it is advisable to communicate openly with the ATO. Doing so can allow you to negotiate revised terms and avoid severe repercussions.

What Happens at the End of the Payment Plan?

At the end of your payment plan, the payments should stop automatically from your end. However, you should keep up with your current ATO obligations. If you have direct debits set up, you should cancel those with your bank.

It may take some time for your plan to show as paid off. However, there won't be any interest charges after you've made the final payment. It doesn't hurt to check with our office to ensure everything is finalised and you have no pending payments.