Can I be released from my tax debts when facing financial difficulty?
As the economy adjusts to the removal of most government COVID support measures, coupled with the slow rollout of national vaccination and mostly closed international borders, there is no doubt that there are and will be many Australians facing financial difficulties in the immediate short term.
If you have a tax debt that is compounding your financial difficulties, there may be a solution. You may be able to apply to be permanently released from the debt provided you meet certain criteria.
According to the ATO, to be released from a tax debt, you will need to be in a position where paying those debts would leave you not being able to provide for yourself, your family or others that you’re responsible for. This includes providing items such as food, accommodation, clothing, medical treatment and education.
This debt release only applies to individuals and trustees of the estate of a deceased person. Other entities such as companies, trusts, and partnership are not eligible and need to apply for other ATO support such as negotiating a payment plan or extra time to lodge or pay the tax.
In addition, only certain tax can be considered for release. For example, the ATO cannot release debts in relation to GST, PAYG withholding, excess contributions tax, Div 293 liabilities and director penalty notices.
Debts that the ATO can consider for release include income tax, PAYG instalments, FBT and FBT instalments, Medicare levy and surcharge, certain withholding taxes, and some penalties and interest charges associated with these debts.
When you apply to be released from a tax debt, the ATO will look at your household fortnightly income and expenditure to determine if you have the ability to pay all or part of your debt and set up a payment plan if required. It will also look at your household assets and liabilities including your residential home, motor vehicle, household goods, tools of the trade, savings for necessities, collections etc. and identify whether the sale of a particular asset could repay all or part of your tax debt.
Even when the ATO has established that the payment of your tax debt would cause you serious hardship, it will nevertheless look at other factors within your control that may have contributed to this hardship. For example, how your tax debt arose and whether you’ve disposed of funds or assets without providing for tax debts, as well as your compliance history. It will also check whether you’ve structured your affairs to place yourself in a position of hardship (eg by placing assets in trusts or related entities).
If you do decide to apply for a release from a tax debt, one important thing to note is that it is the ATO’s view that if you have other debts (either business or private) that you are not able to pay, then releasing you from your tax debt will not improve your financial hardship and therefore it will likely decide against granting a release from the debt. It’s a catch-22 situation where the more debt you have, the less likely you’ll be granted a release.
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