For most of us, filing our tax return is a tedious but necessary evil. As 30 June looms some of us are booking in with our tax agent, excited at the promise of a refund! If that’s you, you’re in a lucky position as some are living in dread that there will be a hefty bill to pay with no means in which to pay it back.
But what can you do about a huge tax bill? There are options available, but individual circumstances will determine the best course of action to take.
For Christine*, a single mum with one child, the best option for her was to file for bankruptcy. After her relationship breakdown and years of self-employment, she’d amassed a tax debt of $115,000.
Christine had been working as a business consultant under a company and trust structure and the tax debt was a result of her earnings being classified as PSI (Personal Services Income). On top of this, turbulent employment contracts meant that Christine had to rely on unsecured credit in between jobs so she also owed $200,000 in credit cards and loans and had a modest super balance (less than $50,000). She was renting at the time, didn’t own property and had a car under finance.
Her minimum monthly repayments towards her unsecured debt were around $5,000 and the ATO wanted an additional $5,000 per month to cover the tax debt.
After getting a lot of advice from a variety of financial specialists she decided to file for bankruptcy as there was no way, with her current earning capacity, that she would have been able to pay all the debts she owed.
Now, her income contribution liability in bankruptcy is around $1,500 - $1,700 a month and she also managed to keep up with her car loan payments and hang onto her car.
So, if you’re getting more and more anxiety at the threat of EOFY arrives there are several options to consider if you think you’ll be hit with a large tax debt this year:
Get a loan to cover it
Based on our experience and the experience of our clients, obtaining an unsecured loan for tax debt is unlikely unless you own property. Your ability to refinance a property will ultimately come down to equity and serviceability in addition to other lending criteria.
If you have little to no assets and a large tax debt lending usually isn’t an option.
Sweet talk the ATO?
One of the best options is to contact the ATO and request a payment plan. Requesting either a lump sum payment or paying via instalments is a good option, with 24 months commonly the longest duration for an ATO payment arrangement
If the tax debt is large, consider whether paying it off over 24 months (plus interest) is mathematically possible in your current situation. For Christine, due to her other debts, this just wasn’t an option.
What if I don’t pay my tax debt?
The ATO may refer the debt to an external debt collection agency who’ll pursue you for the outstanding amount on the ATO’s behalf or you may be facing stronger action from the tax office.
Stronger action can include;
• A garnishee notice against wages through you employer or financial institutions you bank with
• A garnishee notice against any trade debtors and merchant card facilities
• If you’re running a company, you may receive a statutory demand which may result in the company being wound up. If this happens, a liquidator may be appointed to sell company assets
• If running a company, you may receive a Directors Penalty Notice - this means that you’ll personally owe the tax money
• The ATO may obtain a judgment against you personally. Should this occur, the tax office can use this to force you into bankruptcy
Recent changes in legislation now allow for the ATO to report outstanding business tax liabilities to credit reporting bureaus. This may occur if there’s been no attempt to resolve the debt or engage with the ATO on your end.
Is going bankrupt a viable option?
When someone becomes bankrupt, all provable unsecured debt is no longer payable.
Unsecured debts include credit cards, personal loans, shortfalls and even tax debt. This means no more phone calls or threatening letters from creditors after the date of bankruptcy.
A Trustee in bankruptcy, like Aravanis, is appointed to manage what will be known as “your bankrupt estate”. Bankruptcy generally lasts for 3 years and 1 day, but then you’ll be automatically discharged. Your credit report will show a notation of the bankruptcy for a further two years after discharge (five years in total) before it’s removed completely and standard lending criteria applies.
You may need to make contributions towards your estate depending on your earnings and while some assets are protected under the Bankruptcy Act, others are not.
If you’re considering your options and need to explore bankruptcy, you should consider obtaining free information from a Registered Bankruptcy Trustee firm or from the Australian Financial Security Authority (AFSA) before filing. That way, you’re not flying into it blind and know what to expect.
* names changed for confidentiality purposes
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John is a CPA with more than 13 years of personal insolvency experience up his sleeves. He’s also a manager at Aravanis, one of the largest registered bankruptcy trustee firms in Australia.
Aravanis offers free bankruptcy-related information that’s specific to individual situations.
If you’re looking for a more comprehensive outline of bankruptcy see article, what is bankruptcy, or call 1300 369 108.