Why Do I Owe The ATO Money?

Received A Tax Bill & Not Sure Why?

It’s the dreaded tax time again and after finally lodging a tax return and breathing a sigh of relief, a bill arrives from the ATO demanding payment of money owing. Why and how has this happened? The most common reason is that insufficient tax payments were made to the ATO throughout the year in accordance with the individual’s tax bracket determined by their yearly income.  

Small businesses, self-employed individuals and sole traders are the most likely to get caught out for not making enough tax payments in PAYG (pay as you go) instalments throughout the year to the ATO. For those who might fit the description above it is recommended that a comprehensive small business accounting guide be reviewed to ensure that all the basics of accounting in Australia are understood. If working as an employed individual, the employer may not have withheld enough tax from each payment made to fulfil tax obligations.

An increase in yearly income through promotion, property investment, dividends on shares, or simply an increase in business profits could result in moving into a higher tax bracket and higher tax payments. This increase in the income threshold of either single and family households may result in a Medicare Levy or Medicare Levy Surcharge needing to be paid, thus resulting in receiving a tax bill.  

How To Know If Money Is Owed?

After an income tax return is lodged with the ATO, a notice of assessment will be received detailing the amount owing, the payment due date, and the payment reference number. It is easy for individuals, sole traders and businesses to keep track of their tax status by utilising the government’s online services by making a MyGov account and linking it to the ATO service. This is where the outstanding balance, payment due date and payment reference can be found, as well as where the tax payment can be made.

The ATO also provides an income tax estimator tool as one of their online services that can be used if wanting to find out if any money could be owing before tax return time. If still unsure, making an appointment with an accountant is advised. An accountant will determine the assessable income and check that the PAYG instalments are on track to ensure that all tax obligations are being satisfied as well as provide professional advice on how to keep on top of payments to minimise business tax debt.   

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A Bill From The ATO Has Been Received, What To Do Now?

Payment of monies owing can be made to the ATO via the MyGov and ATO online services. If the assessment seems to be incorrect, a dispute or objection can be made to the ATO. However, despite lodging a dispute, the outstanding payment will still need to be made by the payment due date regardless, as interest will still incur on any overdue amounts.

A request to defer payment until the dispute is resolved or a 50:50 arrangement can be made if one has a good payment history. If payment is deferred, interest will still apply to any amounts still owing after the payment due date, even if the dispute is resolved in the objectors’ favour. Alternatively, a 50:50 arrangement involves paying at least 50% of the disputed amount plus any other owing tax debts. The other 50% of the payment can then be deferred until the dispute is resolved. If the dispute is not ruled in the objectors’ favour, they then pay 50% of the interest owing on the deferred payment.

If the entire debt cannot be paid in time, the ATO does allow for payment plans to be set up for individuals, businesses or a sole trader that owe less than $100,000. These can be found by using the MyGov and ATO online services. 

What Is The Deadline?

The deadline for payments owing will be stated on the notice of assessment sent by the ATO after a tax return is lodged at the end of the financial year. The due date and amount owing can also be found by using the MyGov and ATO online services. 

What Happens If Payment Is Not Made?

If the amount owing is not paid by the specified due date, a general interest charge will automatically be applied and the indebted party contacted. The interest is calculated on a daily compounding basis and added periodically to the amount owing, which increases every day. Any interest paid can be claimed as a tax deduction in the year it was incurred. The accrued interest for a delay in payment can be reduced or cancelled if the ATO is contacted and they consider the argument for payments not made are fair and reasonable.  

The ATO can also use any money from a tax refund or credits from earlier tax returns or a business activity statement to reduce the debt owing as they are required to by law before releasing the funds.

The ATO will take stronger legal action against those who are unwilling to cooperate, default on agreed payment plans, cannot pay and are unwilling to change their circumstances, or deliberately avoid payment even after an audit. Stronger actions can include but are not limited to, issuing a garnishee notice, a director penalty notice and a bankruptcy notice. For more information on these stronger actions and what other legal proceedings are involved, a comprehensive list can be found on the ATO website. Currently, the ATO does not use an external debt collection agency to collect on debts owing, this may change in the future.  

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How To Avoid Owing Tax In Future?

So how can this be avoided? Luckily, with some prior knowledge and preparation, it is easy to fulfil annual tax obligations and avoid losing more money than expected to the Australian Taxation Office. 

There is a straightforward solution for employed individuals who have PAYG instalments paid for them by an employer, and they have an extra income that has less or no tax withheld. They can ask their employer or payer to withhold a greater amount of tax in order to ensure that there will be no tax bill at the end of the financial year. This is referred to as upward variation. 

For sole traders and businesses, there are two options to keep on top of regular tax payments throughout the year. The ATO recommend that sole traders enter into voluntary PAYG instalments within their first year of business. The instalments will be paid regularly, usually, every 3 months and the amount paid will depend on the business income and investments. This is a great way to prepay tax over the year and is easy to set up online through the MyGov and ATO government websites.

The other option is simply making tax prepayments throughout the year. This can be done at any time and of any amount. Pay by BPay or through MyGov. These payments will be held against the amount that will be owed or will be used to pay off any debts that may be outstanding. Any payments not used can be refunded at the request of the payer or their agent.

Feeling Overwhelmed Or Want More Information? 

Taxation is a complicated issue that can seem overwhelming, particularly for the self-employed and business owners. Luckily, The Accounting Centre is here to help local businesses and individuals with expert advice on any and all taxation issues and business tax affairs. Set up an appointment with the #1 Albany tax accountants to save time, stress and better understand the financial obligations of Australian businesses today. 

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