One of the temptations for some business taxpayers is to defer their tax obligations during tough trading periods. Often, the logic behind such a decision is that the ATO can wait when the business is going through a “rough patch” until things turn around (which they never do in some cases). In many cases a struggling business pays their employees and utilities such as electricity so that they may continue to trade but delay their lodgement obligations and fail to pay their ongoing tax liabilities.
In addition to non-lodgement, some taxpayers fail to keep proper records such as receipts and invoices. This makes life difficult for accountants who will have limited time to address these issues once the ATO commences legal action to recover outstanding debts.
What many fail to consider is the high rate of interest which the ATO charges on outstanding tax liabilities. This is referred to as General Interest Charge. At present the rate is 9.01% per annum compounding daily. In addition, non-lodgement can result in failure to lodge penalties which range from $180 to $4,500 and possibly more per each failure. Though taxpayers can apply for remission of interest and penalties, it is only achieved based on certain justifiable grounds in relation to which there is documented evidence.
The commencement of legal action by the ATO ordinarily means that in addition to incurring interest and penalties a taxpayer will incur legal fees to pay for legal representation. It is simple to see how a decision to neglect one’s tax obligations can be very costly. Not only are there civil consequences in terms of judgments, legal costs and bankruptcy/liquidation, there is the possibility of criminal proceedings for fraud and failure to lodge offences which carry the possibility of gaol in the most serious cases. What may start as an oversight could quickly escalate if left unchecked.
It is critical to alert your accounting and legal advisors at the first sign of possible legal action in relation to your tax obligations. In some instances, legal action can be avoided and this could save you considerable costs. For more information, please contact our team of tax law experts for a consultation.