For many, lodging tax returns can mean a nice little bonus if you’ve overpaid on your taxes throughout the financial year.
But for some of us, there can be a sense of dread and uncertainty around tax time, especially if you know you’re going to owe money to the ATO. If you’ve avoiding submitting your tax returns for this reason, the dread and anxiety may be increasing every year.
When it comes to tax debt, we commonly see it arise from not paying enough income tax for people working two or more jobs, not provisioning for HECS debt, capital gains tax from the sale of assets and GST and personal income tax owing from people who’re self-employed.
Working two or more jobs
You know when you start a new job and your employer gives you a tax file number declaration? Well, Question 8 on this form asks if you want to claim the tax free threshold from that employer.
This is important because if you’re an Australian resident for tax purposes, the first $18,200 of your annual income isn’t taxed. That’s the tax free threshold. When you tick YES on question 8 of your tax file number declaration form, your employer will calculate your pay-as-you-go (PAYG) tax based on the first $18,200 of your income being tax-free.
Here’s the thing though, if you’re working more than one job and both or more employers are claiming the tax free threshold, it’ll mean that you’re not paying enough tax from each payday and will likely have a debt at the end of the financial year.
As an example, let’s say you’re earning $50,000 gross taxable from your fulltime job and you decide to take up a part time role where you’ll earn an additional $20,000 during the financial year. Your total gross taxable income for the year will be $70,000 and the income tax payable on this amount is around $15,700.
If you tick YES to the tax free threshold for both jobs, you’re effectively claiming double the tax free threshold for the year when you’re only entitled to claim $18,200. The result would be that you’d probably underpay on income tax by around $6,500 and this amount would be billed to you as an income tax debt at the end of the financial year.
Whether you studied twenty years ago or you’re still studying; depending on your income and HECS balance, you may need to make contributions towards your student debt.
Your HECS-HELP debt repayments will take effect through your taxes once your income surpasses the compulsory repayment threshold.
In 2019-20 if you’re earning over $45,881 then you’ll need to start paying at least one per cent of your income towards your HECS debt. The percentage you owe goes up incrementally as your salary increases.
For those earning over $106,594 you’ll need to pay eight per cent of your gross salary each year.
If you don’t inform your employer of your HECS debt, the relevant percentage of your income won’t be set aside from your wages each pay. Depending on your income and HECS balance, this might leave you with a hefty income tax debt at the end of the financial year.
Capital gains tax
If you’ve sold assets in the last year such as an investment property, shares, crypto-currency or other investments, you may have made a capital gain or a capital loss. Any gains you’ve made will be assessable for tax purposes and will incur a capital gains tax.
Setting aside sufficient funds from the sale of the asset is a good idea. That way, you’ll be able to pay the additional tax when you submit your tax return at the end of the financial year.
Personal Services Income
Personal services income (PSI) is relevant to people who earn income as a sole trader, partnership, company or trust, whereby the income you produce is derived from your personal skills or efforts as an individual.
Although you can receive PSI in almost any industry, trade or profession, some of the most common PSI workers are IT consultants, financial professionals, engineers, medical practitioners and construction workers. The general rule for determining if your income is classified as PSI is when more than 50 per cent of the amount you received for a contract was for your labour, skills or expertise.
We’ve seen many examples of PSI professionals operating a business under a company or trust structure due to bad tax accounting advice. In these situations, some individuals with PSI income had been distributing their earnings amongst a partner or other family members under a trust or company, with the intention to reduce the amount of tax payable. Problem is, if your income is classified as PSI, you’ll be taxed on the amount you’ve earned regardless of how you’ve distributed it amongst your company or trust.
Not lodging tax returns
For many this seems obvious but when teamed with not paying tax liabilities, it’s usually the root cause of a mounting tax debt. Incremental unpaid tax building up over time becomes far more difficult to address when years’ worth of liabilities are eventually billed in one lot.
Burying your head in the sand and not submitting tax returns won’t make your tax debt go away. In fact, it’ll likely cost you interest and penalty charges. So, we always advise people to try and lodge any outstanding returns as quickly as possible.
So what to do if you have a large tax debt?
Once you’ve found out how much you owe, you should contact the ATO to see what payment arrangements can be made. There are many tools available via the ATO such as the Payment Plan Estimator.
While tax debt is rarely waived, it can be considered under some extenuating circumstances such as serious hardship due to family tragedy, financial misfortune, serious illness, impacts of natural disaster and other serious or difficult circumstances.
The ATO may also agree to stop pursuing the debt if it’s not commercial to do so. If this happens, it’s important to understand that while the debt may be dormant, it doesn’t mean it’s been waived.
If you have a large tax debt and you’re unable to pay it or make suitable arrangements then Bankruptcy or even a Personal Insolvency Agreement (PIA) may be options to consider. Talk to a trusted financial advisor or a registered bankruptcy trustee to understand your options and take action as soon as possible.
John Papadopoulos is a CPA accountant with over 15 years’ experience in Personal Insolvency.