What is ATO debt forgiveness?
ATO debt forgiveness is when the Australian Taxation Office releases a company or person from some or all of their tax debt. The rules around ATO debt forgiveness are complicated but here is a summary:
- Sometimes the ATO will release a person from some or all of their tax debt – that is restricted to a situation where paying the tax debt would cause serious hardship, or if the debt is not legally recoverable.
- Sometimes the ATO will release a company from some of its tax debt, but only penalties and interest – the ATO does not have the power to release a company from primary tax debt.
- The ATO will sometimes agree to accept less than the full amount of a company’s primary tax debt, but only as part of a formal insolvency procedure such as voluntary administration or small business restructuring.
Who can apply for a release from tax debt?
There is an ATO form for applying for release from a tax debt. You can apply for release if you are an individual (person) or the trustee of the estate of a deceased person. Companies, trusts and partnerships cannot apply to have tax debts released.
If I am the director of a company, how do I apply for a reduction in penalties and interest?
Sometimes the ATO will agree to a reduction in penalties and interest, but not the primary tax debt. A director may apply directly to the ATO, but it is more common for the company’s external accountant to make the application.
There is debt forgiveness, release, write-off and waiver – what’s the difference?
There are a different terminologies around debt forgiveness. That includes: forgiveness, release, haircut, write-off and waiver.
What is ATO debt forgiveness?
“Debt forgiveness” is the catch all term that refers to the ATO agreeing that some or all of your tax debt need not be paid.
What is a Release from your tax debt?
“Release” is the ATO term for when it permanently removes some or all of an individual’s (persons) tax debt. There is no technical difference between forgiveness and release. Sometimes the terms “haircut” or “write-off” are also used, colloquially.
What is a waiver of your tax debt?
“Waiver” is a specific term under Section 63 of thePublic Governance, Performance and Accountability Act 2013whereby the Finance Minister may waive amounts owing to the Commonwealth. That waiver permanently extinguishes a debt owed to the Commonwealth. The ATO does not have the power to grant a waiver. A waiver is very rare. The vast majority of people and companies would not be granted a waiver. Waiver will only be granted by the Miniter once all other available options have been considered and the Minister determines it would be appropriate.
Will the ATO forgive a company debt by agreement or negotiation?
No. The ATO does not have the power to forgive the primary part of a tax debt for a company. You may see or hear of debt forgiveness for companies but that will refer to two situations:
- forgiveness of penalties and interest and not the primary tax debt – so, a director cannot negotiate a reduction in primary tax debt.
- Formal agreements to “forgive” a tax debt by using a formal insolvency procedure being either voluntary administration or small business restructuring. To be clear, this is not done by “negotiation” with the ATO, but rather through formal company restructuring laws under the Corporations Act.
Why would the ATO decline a debt forgiveness offer? Isn’t it better they get something rather than nothing?
The ATO does not explain the reasons for its policy other than to say that they have a statutory obligation to pursue the recovery of tax debts. In a practical sense, if the ATO were open to negotiation then they would be deluged by those requests. The ATO will refer people and companies to formal insolvency procedures such as liquidation, voluntary administration, small business restructuring, debt agreements and bankruptcy. The ATO does actively engage in all of those formal procedures.
Will the ATO forgive a primary company tax debt by a way other than negotiation?
Yes. If a company or person enters into a formal insolvency procedure (such voluntary administration, small business restructuring, debt agreements and personal insolvency agreements) the ATO will actively participate in those processes and consider offers made on their merits. In fact, the ATO is very cooperative in those processes and is willing to accept reasonable offers. By way of example, in small business restructuring the ATO has accepted debt forgiveness of up to 90% and commonly approves proposals at 80% debt forgiveness.
Why would the ATO reject a direct proposal and then accept something similar under a formal insolvency procedure?
The ATO simply doesn’t have the power to accept an offer put to it by way of negotiation. When a company or individual enters a formal insolvency procedure, then that involves an external independent party being appointed to control that process, report to all creditors and provide opinions on the adequacy of offers made under the insolvency procedure. In these situations, the ATO will have the same rights as other creditors. They can vote to accept or reject the offer.
What are the insolvency procedures to use to get ATO debt forgiveness?
There are a variety of formal insolvency procedures that can be used to seek ATO debt forgiveness. Each is designed for different situations. In all cases, the ATO will engage with the process and will decide to accept or reject offers on their merits.
Using Small Business Restructuring for ATO debt forgiveness
Small Business Restructuring (SBR) is a process for companies introduced in 2021 to assist small businesses in financial difficulty. SBR allows a small business to propose a Plan to its creditors to restructure its debts while the directors remain in control of the business. It is restricted to companies that have total debts under $1million. It is cheaper and simpler than a voluntary administration. The ATO is a supporter of the SBR process, generally and has often voted in favour of proposals under SBR of 80% debt forgiveness.
Using Voluntary Administration for ATO debt forgiveness
Voluntary administration is a process for companies and has been around for many years. The company’s directors appoint a voluntary administrator by way of a simple resolution. The process is usually completed in a little over a month. There is no upper limit to the amount of debt (unlike small business restructuring). During that time, there is a moratorium on any recovery action by creditors, including the ATO, against the company and it stops the enforcement of personal guarantees against directors. Again, the ATO actively participates in the VA process and together with other creditors will vote for or against proposals on their merits.
Using a Debt Agreement for ATO debt forgiveness
Debt agreements (DA) are for individuals (persons) and is a simple process under the bankruptcy act. A person appoints a Debt Agreement Administrator to run the process and report to creditors. It is restricted to people with debts under around $133,000 (the amount changes and there are other restrictions). The process allows a debtor (someone in debt) to offer an amount to their creditors being what they can afford to pay over a period of time, often three or four years.
Using a Personal Insolvency Agreement for ATO debt forgiveness
Personal insolvency agreements (PIA) are for individuals (persons) and is a simple process under the bankruptcy act. A person appoints a Trustee to run the process and report to creditors. There are no limits in a PIA (unlike DAs). The process allows a debtor (someone in debt) to offer an amount to their creditors being what they can afford to pay.
So sometimes the ATO will forgive a debt for individuals (Persons) – what are the details?
Yes, sometimes the ATO will release a person from some or all of their tax debt. It is in limited circ*mstances only and is not common. In general, it is restricted to a situation where paying the tax debt would cause serious hardship, or if the debt is not legally recoverable.
When can the ATO decide to not pursue a debt?
The ATO will generally not pursue a debt if it is satisfied that the debt is not economical to pursue or irrecoverable at law. If a decision is made to not pursue a debt on the basis that it is uneconomical to pursue, the debt can be re-raised by the ATO in the future. The ATO will consider various factors in deciding whether a debt is not economical to pursue including whether the anticipated cost of future recovery is likely to exceed the amount of the debt, the age of the debt and the type of debt involved.
How does an individual apply for debt forgiveness?
An individual (person) can apply for release from their tax debt of $10,000 or more in certain circ*mstances. There is a form on the ATO website. If the tax debt is below $10,000 a person can call and make that enquiry.
Which tax debts may be released?
The ATO has a specific list of tax debts where they will consider release. Those types of debts are: income tax, pay as you go instalments, FBT, Medicare levy, withholding tax on dividends, mining withholding tax and some penalties and interest.
Which tax debts can’t be released?
Not all tax debts can be released. The ATO will not release debts for: GST, PAYG, Excess Contribution Tax, SGC and Director Penalty Notice debts.
What is the definition of serious hardship?
The ATO will consider release form tax debts when a person (not a company) is facing “serious hardship”. The ATO considers hardship to exist 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. The test is to establish whether the result of paying the tax would be so burdensome that the person would be deprived of what are considered necessities according to normal community standards.
What is the ATO Debt Release tool?
Yes, the ATO has a simple tool on their website that can be used by anyone wanting to explore whether the ATO would consider debt forgiveness.
What are the commercial debt forgiveness rules? (different thing!)
The commercial debt forgiveness rules are a set of provisions in the Income Tax Assessment Act 1997 that apply when a commercial debt owed by a person or company is forgiven. This is a different topic than that being addressed above. The rules aim to prevent a person or company from gaining a tax advantage from having a debt forgiven.
