This year it’s highly likely that my husband and I will have a reasonably large tax debt due to the growing dividend income from investments. I have had large tax bills in the past and so I thought I would share what we’ve learnt from our past experiences with Australian Tax Office (ATO) debts.
Don’t Panic (or at least try not to)
The first time I received a tax bill I was immediately sick, stressed and terrified at the unknown. The feelings I felt at the time were a completely natural response (especially for someone with anxiety), but I want to reassure you that getting a tax bill isn’t the end of the world (although it does feel like that at the time). Make yourself a cup of tea, take a few breaths, and phone a support person if you need to.
Note: If you are feeling so overwhelmed or anxious by a debt to a point where you are unable to cope then please seek mental health assistance to complement the steps below.
Don’t bury your head in the sand
The worst thing you can do with a tax debt is to ignore it. It won’t magically go away, and the longer you delay dealing with it the more difficult it can be. The most important thing to do is to read your ATO Tax Assessment letters or any other correspondence you’ve received regarding this debt (you will receive this information via mail or the online ATO portal). The ATO correspondence will provide you with dates as to when the tax bill is due, where to make a payment, and what your options are if you can’t pay the full bill by the due date (eg. payment plan).
Emergency Fund
If you have a fully funded emergency fund or the money in savings to pay for your tax bill outright then you can pay it off by phone or online via the MyGov ATO portal. If you don’t have the money to pay it off that’s okay you can organise to pay via payment plan. The benefit of paying it off in full is that you will avoid any interest that a payment plan from the ATO may incur.
Payment Plan
If you don’t have enough money to pay your tax debt the ATO allows you to enter into a payment plan. ATO Payment Plans are designed to allow you to pay off your tax debt and any interest in a time frame that suits your financial situation. Be aware that ATO Payment Plans do attract interest so the longer you take to pay off the debt the more interest you pay.
If your debt is $100,000 or less then you can set up your payment plan online without even talking to someone (which can take a lot of the anxiety and even shame out of it). You can also call the ATO directly or have your tax agent negotiate your payment plan on your behalf.
Calculating your Payment Plan repayments and term
The ATO offer a Payment Plan Estimator here that allows you to run your own scenarios anonymously.
Additional Notes:
- In order to set up your payment plan online you need to agree to an upfront 10% repayment within 7 business days of agreeing to the payment plan.
- You also need to set up your repayments to pay the debt and interest off within 2 years.
- Interest is currently charged at 7.04% (current rate Aug 2021)
- You can make additional payments at anytime after you sign up to a payment plan.
- You can opt to pay it off as quickly as you can afford to.
- You can make payments weekly, fortnightly or monthly.
- It’s important that you stick to the plan you’ve agreed to once set. If something changes and you can no longer pay you will need to call the ATO immediately to let them know your change in circumstances.
Example ATO Payment Plan: If you used the online payment plan estimator and had a $5000 debt you would need to agree to pay $500 within the first 7 days of starting the plan. After this you would need to pay $50 a week for 96 weeks (plus one additional part payment of $11.03) to pay the loan off within the maximum 2 year repayment period. This would incur $311.03 in interest over this period. If you opted to pay it off sooner the interest would be reduced.
What if you can’t pay a 10% upfront payment? or afford to pay the debt off within 2 years?
If you are in serious hardship, need a little more time to pay, or can’t afford the upfront payment then call the ATO directly. They have additional supports available to those in serious hardship. By calling the ATO directly you can negotiate more time on your payment plan, or negotiate a reduced upfront payment.
So as you can see getting a tax debt isn’t fun, but it also isn’t the end of the world. If you take steps early you can sort out a payment plan that suits your financial needs without completely ruining your future financial plans.
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