When things get tight, payments required from BAS, IAS or income tax returns can sometimes require us to enter a payment arrangement to help repay the debt. We cover some the important considerations here in more detail.
Before first entering into a payment plan with the ATO, it is important to have all of your lodgements up to date. If they are not, the ATO can apply penalties as well as interest charges.
When entering into a payment plan with the ATO, it is important to be able to answer the question of how much you can afford to pay and when. The ATO prefers to see some upfront contribution and it is also important to be aware of upcoming BAS's and other obligations that should be able to be met on top of the current debt payment plan.
Payment plans of 12 months are fairly common and longer terms are possible, but more questions may be asked. For debt less than $100,000, payment plans can usually be set up online (via myGov for individuals) or by calling the ATO at 13 28 65 for individuals or 13 72 26 for businesses. If the debt is more than $100,000, the ATO may push for a more realistic plan and ask questions about the viability of the business. If any payments are missed, the payment plan stops immediately. The ATO will ask more searching questions when attempting to re-enter into a payment plan after a breach.
It's important to note that interest will apply to the debt at the ATO's prevailing general interest charge. The payment plan estimator on the ATO's website can be a helpful tool in understanding the potential interest charges on a payment plan.
A quick example is covered below.
A startup founder has a debt of $25,000 with the ATO and is having difficulty making payments. The founder contacts the ATO and sets up a payment plan after getting all their lodgements up to date. The founder is able to make an upfront contribution of $5,000 and agrees to make monthly payments of $2,000 for 12 months. The ATO calculates that the interest charges on the payment plan will be $1,250. The founder agrees to the terms and makes their first payment of $2,000, as well as the upfront contribution of $5,000. The founder continues to make their monthly payments on time and successfully pays off their debt in 12 months.
Organising a payment plan with the ATO can help in managing debt and avoiding penalties and interest charges. It is important to have all lodgements up to date, be able to answer questions about affordability, and understand the terms and potential interest charges of the payment plan. By taking the initiative and approaching the ATO, a payment plan can be set up that works for both the taxpayer and the ATO.