Updated ATO guidance: debt relief, waiver and non-pursuit of tax debts
Tax related debts are sometimes ignored by those struggling with inflationary pressures, cost of living increases and sky-high energy prices. However, this may not be the wisest course of action since these disregarded tax debts are likely to continue to accumulate general interest charge. A simpler way of dealing with these debts, particularly if experiencing serious hardship, is to apply for release from the debt.
Updated ATO guidance
The ATO has recently updated its Law Administration Practice Statement PS LA 2011/17 on debt relief, waiver and non-pursuit which may provide more clarity on the circumstances in which a tax debt will be released in cases of serious hardship.
Specifically, the Practice Statement provides guidance on the Commissioner’s discretion not to pursue the recovery of tax debts, and the ATO’s ability to release individual taxpayers from their obligation to pay certain tax-related liabilities in cases of serious hardship.
When will a tax debt not be pursued?
Generally, the ATO will not pursue a debt if they are satisfied that the debt is uneconomic or irrecoverable at law. There are many factors which determine whether debts are uneconomical to pursue, including, but not limited to:
- the anticipated cost of future recovery likely to exceed the amount of the debt;
- the age of the debt;
- the type of debt involved (i.e. super guarantee charge debts are more likely to be pursued);
- the taxpayer cannot be located (the debt may be re-raised when the taxpayer is located); and
- the asset position of the taxpayer.
However, in certain instances, such as where a taxpayer has a significant history of non-compliance or where there are public interest considerations, the ATO may pursue a debt even though it may be uneconomical.
Release from tax liability on ground of serious hardship
The Practice Statement also details the tax liabilities that taxpayers can be fully released from in cases of serious hardship. It also sets out the application process to obtain release. Serious hardship is given its ordinary meaning in this context. According to the ATO, serious hardship exists where the payment of a tax liability would result in a person being left without the means to afford basics such as food, clothing, medical supplies, accommodation or reasonable education.
To decide whether serious hardship exists, the ATO will use the income/outgoings test, the assets/liabilities test, and other relevant factors to determine whether the consequences of paying the tax would be so burdensome that the person would be deprived of what are considered necessities according to normal community standards.
The income/outgoings and the assets/liabilities tests are quite straight forward. The former assesses the taxpayer’s capacity to meet their tax liabilities from their current income taking into account household income and expenditure. The latter assesses the taxpayer’s equity in, or access to, assets which may be indicative of their capacity to pay (including residential property, motor vehicles, life insurance or annuity entitlements, collections, furniture and household goods, tools of trade etc).
Other relevant factors that are considered
It is the category “other relevant factors” that has recently been updated. It now states that when deciding whether release should be granted, the ATO officers should take into consideration the facts of the case and have regard to the taxpayer’s particular circumstances. In addition, the examples of the factors the ATO may consider in arriving at their decision have also been reordered and reworded in the recent update as follows:
- release would not alleviate hardship, such as where the person has other liabilities or creditors
- whether it was reasonable for the taxpayer to acquire assets ahead of meeting their tax liabilities
- whether a taxpayer has made plans to address their tax liabilities prior to disposing of funds or assets
- whether a taxpayer has paid other debts (either business or private) in preference to their tax debt
- whether the taxpayer has pursued debts owed to them or provided reasons as to why they have not
- whether serious hardship is likely only to be short term
- whether there was an event that led to a change in the taxpayer’s compliance
- the taxpayer’s past compliance history, including lodgment of returns, payment of tax debts and the outcome of any audit or enforcement activity taken to enforce compliance
- whether the taxpayer has made plans to pay future debts
- how the taxpayer has structured their affairs and whether they have placed themselves in a position of hardship (for example, placing all assets in trusts or related entities over which they have control)
Applying all three tests will enable the ATO to decide whether serious hardship exists and to what extent. It may be the case that while hardship exists, it does not warrant a full release of a tax debt. In this case, a partial release may be applied. Nevertheless, any taxpayer wishing to apply for release of debts based on serious hardship should review the updated Practice Statement.
Need help with an ATO debt?
With the soaring rate of inflation, increasing living costs and challenging economic conditions, tax debts may be ignored as many taxpayers deal with more immediate bills. However, there are painless ways to deal with ATO debts, either through a payment plan or a full/partial debt release. Contact us today for more information.
For expert advice and assistance in dealing with your Tax Debt in Australia, please contact Mathews Tax Lawyers on 1800 685 829
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.