Handling unforeseen tax debts: A guide for small business owners

Late last year, a wave of unexpected news swept through the Australian business community as thousands of taxpayers and their representatives received notifications from the Australian Taxation Office (ATO) regarding outstanding historical tax debts. What made this revelation particularly startling was that many recipients had no prior knowledge of these lingering tax obligations.

The ATO's protocols dictate that a taxpayer can only be absolved of a tax debt under specific circumstances, such as instances where payment would lead to severe financial hardship. However, there are occasions when the ATO opts not to pursue a debt due to economic impracticality. In such cases, the debt is temporarily "on hold," remaining dormant in the taxpayer's account until a later date. These dormant debts are often offset against potential refunds, a practice that ceased during the COVID-19 pandemic, leaving many debts unaddressed.

In 2023, the Australian National Audit Office highlighted the inconsistency of excluding debts from offsetting, regardless of when they originated. By this juncture, the ATO's collectible debt had surged by a staggering 89% over a four-year period, culminating in June 2023.

In response to mounting concerns, the ATO took proactive measures, reaching out to thousands of taxpayers and their representatives to apprise them of these historical debts placed "on hold." These debts, spanning several years and ranging from nominal amounts to substantial sums, came as a revelation to many, given that dormant debts do not reflect in account balances, effectively rendering them invisible.

In a recent statement, the ATO affirmed its commitment to address these issues in a prudent and community-conscious manner, temporarily halting actions related to debts placed on hold prior to 2017 while reviewing a more equitable approach.

However, it's crucial for taxpayers to understand that the mere absence of active pursuit by the ATO doesn't equate to debt extinguishment. This underscores the importance of remaining vigilant and proactive in managing tax obligations.

Notably, small businesses find themselves disproportionately affected by this issue, with two-thirds of the $50 billion collectible debt owed to the ATO stemming from their sector. As of July 2023, the ATO resumed its standard debt collection practices. For entities with debts surpassing $100,000 and lacking repayment arrangements with the ATO, the debt may be disclosed to credit reporting agencies, potentially impacting credit ratings.

For businesses grappling with outstanding tax debts, engaging with the ATO is paramount. Avoiding the issue in the hopes of it dissipating is seldom a viable strategy and may exacerbate the situation. Instead, proactive communication and seeking professional guidance can pave the way for resolution and mitigate further complications.

In essence, while confronting unforeseen tax debts can be daunting, it’s essential to navigate these challenges diligently, armed with knowledge and proactive measures.

Contact our experts at PKF today to put a plan in place regarding your tax debt.