What are the Real Consequences of having Overdue Tax Returns – Part 1
Ok, so you have gotten yourself into a bit of a situation, and you have one or more outstanding and now overdue income tax returns.
What does it really mean?
In this video I will start with some of the more tangible ATO and tax law short to medium term consequences …
Firstly, as discussed in some of our other videos, your next tax return becomes due much earlier than it otherwise would, and payment of an associated tax also generally becomes due much earlier. So now not only do you have the overdue return to get in order, and potentially some associated tax to pay, but you are on the verge of a double whammy because the next one will also be due very soon, if not already, and its tax will also be due soon!
Next, of course is the very real chance of late lodgement penalties. Now you may have heard from other people that they have lodged late and not been penalised (or if they were they were able to ask the ATO to write-off the penalty for which they obliged). And yes, admittedly it does happen probably more than you might think, but be very careful, if you are putting off lodgement with the expectation there won’t be penalties applied, I think it is a very dangerous game to plan.
Next is interest on overdue tax. So if part of your reasoning for not lodging on time is because you are worried about paying the tax, well I can tell you it is a false economy. Again, sometimes you might be able to get the ATO to waive the interest, though in my experience that is harder today that it may have been in the past. And again I wouldn’t recommend relying on that strategy. Assuming you can’t get them to write it off, the interest rate is definitely more than you will pay on a home mortgage (though admittedly it is less than you will pay on a credit card).
Next, the ATO may require you to lodge other and future tax returns early. So the problem may extend beyond just the current periods. Maybe that is a good thing, it forces you to get your life in order and stay compliant in future. But ultimately you will want to access the lodgement, and payment concessions, all other businesses and taxpayers enjoy, so don’t put that at risk.
Then we start getting into some of the much more painful potential consequences.
The ATO could just assess your tax for you, without you lodging! And if they do that, I can pretty well guarantee you will pay more tax than you would have if you had prepared your own return. At best, this results in a major fight with the ATO and a lot of headaches and sleepless nights. At worst it costs you much more than it should have.
If the ATO know you owe them, including from an automatic assessment they make as discussed, they can do a number of things …
This includes reporting you to Credit Agencies which now means news of your problems are spreading and their could be an impact on your credit rating and financial standing in the future.
This also includes being able to garnishee your bank accounts! What this means is they write to your bank (actually I believe they write to all of them) and let them know that for any bank accounts you hold with them the bank is compelled, by law and with no discretion to deny the request, to pay at least 30% of the balance to the ATO. In this case you have no say in the matter whatsoever!
So this not only sees a bunch of money walk out of your accounts when you didn’t expect it, it also now means the banks know you are having financial difficulties and it could very well affect your ability to borrow and otherwise negotiate with them in the future.
We actually had a Client recently have their bank account garnisheed by the ATO, and as a result the bank put a complete stop on all their accounts so nothing could be withdrawn. It meant wages didn’t get paid for nearly a week, which of course meant some very disgruntled employees, and ultimately this was the beginning of the end for that business!
From there things get even more serious, though to clarify, there is no set order to the potential consequences so depending on your circumstances and the ATO policies and appetite at the time, some of the harsher stuff could come much earlier than I am describing.
But, as I think everyone know, not lodging your tax obligations is an offence, it is against the law, and so this means real legal action can be taken against you which could result in any of a range of consequences, the worst being substantial fines and even jail time.
Now you may be thinking that won’t happen, and for most people even with pretty poor lodgement histories they are probably right and it probably won’t, but, it does happen, it happens surprisingly regularly. So if it is happening to someone, it could happen to you!
In part 2 of this video series on the real consequences of having overdue tax returns I will discuss some of the more intangible consequences.
So make sure you check it out.