For those businesses that are experiencing financial difficulties, it sounds like a good option to enter into payment plan with ATO.
The plan normally allows taxpayers to settle the debt within fixed terms of up to 12 months. If the tax debt is small(less than $100K), the taxpayers can use the ATO's automated hotline to arrange the plan. In other circumstances, the accountant can submit a proposal to ATO on client's behalf.
These all sounds good, but there are some traps.
First of all, a payment plan will not release the taxpayer from personal liability. The most common case is a director who has received Director Penalty Notice. The amount set by DPN becomes director's personal liabilities, and the payment plan does not automatically release director off the hook. So if a payment plan default, ATO can start actions against director straight away.
Secondly, there are few terms and conditions you have to agree on before ATO accepting the payment plan. Among those terms, the most important two are as follow:
1. Following the agreed schedule to make repayment;
2. Lodge and pay all future liabilities on time.
Both terms require taxpayers to have sufficient cash flow. For many businesses in financial difficulties, this is the biggest challenge for the payment plan. And not to forget you have to pay both income tax and BAS on time. Failing to lodge and pay on time on either tax account will cause the payment plan to default.
Also, while the ATO may accept the payment plan in the first time, it will be much less understanding if the plan default. You might still have a second chance if you have enough evidence to confront the commissioner. But your credibility will still be severely affected as result of the default. The default may accelerate the ATO debt collection to next level. And the actions may include garnishee letter, Director Penalty or even insolvency proceedings. Taxpayers should never make the proposal to ATO without checking their affordability.
In conclusion, through the payment plan is an effective way to manage the tax debt, careful considerations should be given to the proposal. A thorough review of the taxpayer’s financial position, plus a realistic forecast for the future cash flow are the foundation of a sustainable payment plan . On top of the plan, it is also important that you implement the strategy correctly to end the financial difficulties. There are many things you can do to manage the tax debt problem actively, and you should never rush for any short term solution.