Tax time isn't usually a favourite season for businesses, and often, this comes down to the stress and strain that result from hefty tax debts and the looming end-of-financial-year tasks and deadlines.
That's where tax debt payment plans come in – they help to lessen the upfront tax burden while ensuring you also meet your tax obligations. In this guide, you'll learn how to set up a tax debt payment plan and the benefits of doing so.
What is a tax debt payment plan?
A tax debt payment plan is a formal repayment arrangement between a taxpayer and the government. It allows you to break down your total tax owed into smaller, more manageable amounts and pay these regularly until you've cleared the debt.
Typically, you'll want to make the repayment period as short as possible to minimise any potential interest charged on top of your tax debt.
Why set up a payment plan?
If you can't pay what you owe in full or by the due date, ignoring it altogether can be costly and stressful. A tax debt payment plan provides a more manageable way to repay what you owe over time, easing the upfront financial burden. A payment plan will also help you avoid:
Accumulating penalties
If you don't pay your tax on time, you'll incur late payment penalties in addition to daily interest charges. This means your debt will continue to grow while it remains unpaid.
Potential legal action
If you don't try to address your debt, the Australian Tax Office (ATO) can file a claim or issue a summons through the court. Once the court recognises this, it'll take legal action against your business, such as a bankruptcy notice or a statutory demand for payment.
Tax payment plan options
The best payment plan option for your business boils down to your cash flow – what funds you have available to pay your tax debt now and into the future. Generally, you'll either be able to pay the debt straight away or will need to chip away at it over time. The three main options for tax debt payment are:
Upfront payment
Upfront payment is the easiest approach, provided you have the funds available. It means you won't need a payment plan, and you'll avoid accruing any interest or penalties associated with these.
Instalments
Paying by instalments is a good option if you can't pay your tax debt upfront. It's best to front-foot this by discussing it with tax authorities before your tax due date, as this will allow you to get a good handle on what duration and payment amounts will work best for your situation. While you'll be charged interest throughout the payment term, you'll avoid penalties and potential legal action.
Interest-free payment plans for overdue activity statements
In some cases, you might be eligible for an interest-free payment plan on overdue activity statements. If you have a small business, you may qualify if your annual turnover is less than $2 million, you have a good payment history, you can't obtain finance through usual channels, and you can demonstrate the ongoing viability of your business.
How to pay your tax debt with a payment plan
Tax debt payment plans can be relatively straightforward, and in some instances, you can set it up yourself online. Here's how:
Login to online services or contact the ATO
If your tax debt is $200,000 or less, you can set up your payment plan online. Alternatively, contact the ATO.
Provide all necessary information
Keep your Australian Business Number (ABN) or Tax File Number (TFN) and details of the amount you owe handy.
Select a scheduled instalment amount
You'll need to decide on the frequency of payments, the amount you can pay (the minimum or more) and the first instalment date.
Set up a payment method for instalments
The easiest option for paying your instalments is to set up a direct debit payment (linked to your bank account or a credit or debit card). Alternatively, you can pay each instalment as it's due, using a method that suits you – via bank transfer, in person at the post office or by mail.
Tax debt payment plan FAQs
How long do you have to pay a tax debt?
The time you have to pay a tax debt is at the discretion of the tax office and can vary from six months to two years. It can depend on factors like your tax history or any exceptional circumstances and can be reviewed after an initial payment period.
Do tax debt payment plans affect your credit score?
Tax debts are generally only disclosed to credit reporting bureaus if you aren't actively working with the tax authorities to manage them.
Can you negotiate your tax debt?
You can negotiate payment arrangements and, in some cases, apply for penalties to be written off; however, the tax debt itself isn't open to negotiation.
Is it possible to forgive a tax debt?
Tax debt can be forgiven or discharged through bankruptcy proceedings or a compromise in certain circumstances. The criteria for this are stringent, though, and they'll also affect your financial position in the future.
Lessen the burden, make payments with a plan
Tax debt is the bane of many businesses' existence, but with a tax debt payment plan, the sometimes overwhelming tax burden can be managed with a timeline and terms to suit. While you may pay slightly more with interest, breaking your debt into manageable chunks will remove unnecessary stress on your business's finances and lessen the ongoing mental load.
Poised with a plan? MYOB's cloud-based platform runs tax time for you. It'll help you stay on top of your tax obligations so that there are no unwanted surprises come tax time. Get started with MYOB today!
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.
MYOB is not a registered entity pursuant to the Tax Agent Services Act 2009 (TASA) and therefore cannot provide taxation advice to clients. If you have a query concerning taxation including filing your BAS return or annual tax statements then you should consult with your accountant or other registered tax adviser.