As a result of COVID-19, Australians’ tax debts are at a record high. During the height of the pandemic, the ATO also slowed its tax debt recovery activity, so it collected less revenue than usual. The outstanding revenue will need to be collected – so what do you do if the ATO sues you for a tax debt?
Your approach will partly depend on whether you agree or disagree with the primary tax liability. If you disagree with the tax liability, you can challenge an assessment by objecting to it. This must be done through the specific process set out in Part IVC of the Taxation Administration Act 1953. However, in addition, you may also face the prospect of defending court proceedings where the ATO is suing you to recover the tax debt.
It can be difficult to defend tax debt recovery proceedings in isolation, without also separately objecting to the assessment. This is because of specific rules in the tax legislation that provide that a tax assessment (e.g. a notice of assessment) is evidence of the amount of the liability stated in the assessment and that the assessment was properly made.
Practically, this can mean that, even if a taxpayer has a genuine dispute about a tax liability, the ATO can take steps to recover the amount stated in the assessment.
What can you do to avoid the ATO starting tax debt recovery proceedings?
You and your advisers need to act promptly in exercising your objection and appeal rights.
In some cases, you can work within the ATO’s own internal guidelines to deal with a debt before the ATO starts tax debt recovery proceedings. For example, you might consider:
- negotiating a 50/50 payment arrangement
- requesting that any general interest charge is remitted
- offering to provide security for the debt.
What can you do if the ATO has started tax debt recovery proceedings?
In cases where the ATO has already started tax debt recovery proceedings and you disagree with the assessments, it is important that you form a strategy to preserve the position in the tax debt recovery proceedings while you object to and appeal the underlying tax liability.
This may involve filing a defence in the tax debt recovery proceedings or negotiating a payment plan while an objection is lodged on the substantive tax or penalty dispute.
Managing both aspects of a tax dispute at the same time can be complicated – it often involves responding to any tax debt recovery proceedings or negotiating with the ATO for a deferral of collection activities and at the same time preparing your case objecting to the underlying tax and penalty amounts.