Behind on Tax Lodgments? Ignoring Them Is a Much Bigger Risk Than Owing the Money
A cash-flow problem and a lodgment problem are not the same thing - and treating them as one can make the situation much worse.
Written by: Melissa Cunliffe (CA)
When cash is tight, delaying a tax return or BAS can feel logical. If the amount has not been calculated yet, perhaps the debt does not feel real. If the business cannot pay anyway, why lodge the form that creates the liability?
Because owing tax and failing to lodge are different problems.
The ATO has a range of actions available for overdue lodgments, including failure-to-lodge penalties, default assessments and, in more serious persistent cases, referral for prosecution. The ATO also uses data matching to identify taxpayers who appear to have income or reporting obligations but have not lodged.
Lodging does not mean you must magically have the cash
A business can be unable to pay and still comply with its lodgment obligations. Once the correct amount is known, the payment problem can be dealt with separately - through cash-flow planning, financing, ATO engagement or, where appropriate, a payment arrangement.
When the return is not lodged, neither the owner nor the adviser has a reliable starting point. The business may be worried about a $50,000 problem that is actually $20,000 - or the reverse.
Why owners delay
Fear of crystallising the debt
Embarrassment about being behind
Poor bookkeeping that makes the return difficult to complete
Not having the money to pay
Belief that the ATO will not act if nothing is lodged
A growing pile of years that feels too difficult to tackle
All of those are understandable human reactions. None makes the underlying obligation disappear.
The ATO can estimate when you do not lodge
One of the least helpful outcomes is losing control of the number entirely. Where lodgments remain overdue, the ATO can issue default assessments or estimates based on the information available to it. That may not reflect the deductions or circumstances the business would have included in a properly prepared return.
A payment arrangement is not the same as fixing the business
A payment plan can be valuable where the debt arose from a temporary issue and the business can meet both current obligations and the historical instalment. But if new BAS and tax liabilities continue to accumulate while the old debt is being repaid, the arrangement may simply disguise a structural cash-flow problem.
The test is not 'Are we paying the ATO something?' It is 'Are we paying current tax and reducing the old debt at the same time?'
Get Your Tax Lodgments Current First
For a business several periods behind, the clean-up sequence matters. Bring the bookkeeping up to date. Identify every outstanding lodgment. Prepare the returns accurately. Reconcile the ATO accounts. Then build a realistic plan for the cash requirement.
Trying to solve the debt before knowing the debt is like negotiating a loan without knowing the purchase price.
When the problem is bigger than tax
If the business cannot meet wages, super, suppliers and current tax without continually adding to ATO debt, the issue is no longer simply compliance. Management needs to understand profitability, margins, owner drawings, debtor collection, finance and whether the business model is generating enough cash.
The 4P's lens
People - Remove uncertainty. Owners make better decisions when they know the real position rather than fearing an unknown number.
Preserve - Bring lodgments current and stop penalties, interest and unmanaged liabilities from compounding.
Protect - Understand director and business exposure and engage early where payment difficulty exists.
Prosper - Fix the commercial cause of recurring tax debt so compliance becomes routine rather than a crisis.
If you cannot pay, do not disappear
Lodge. Understand the number. Then deal with the payment.
That sequence will not make an unaffordable tax bill pleasant. It does, however, keep a cash-flow problem from becoming a compliance, enforcement and potentially legal problem as well.
Behind on tax lodgments and unsure where to start?
Getting your lodgments current can help you understand the real position before tackling the payment problem.
Talk to Future Accounting about getting your compliance back on track and developing a realistic plan for the debt.
Disclaimer
This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.
Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder
Liability limited by a scheme approved under professional standards legislation.
