As an Australian resident, you are legally required to pay tax, depending on your income.
The majority of Australians approach tax time with extreme caution with the expectation of receiving some tax refund. However, instead of receiving a refund for the financial year, some individuals find themselves facing an unexpected tax bill owed to the ATO.
If this has happened to you, do not panic. Here, in this blog, you will get to know what happens when you owe the ATO money.
But first, let us pay attention to the reasons why your tax return shows that you owe money to the Australian Taxation Office.
Why Does Your Tax Return Say You Owe Money?
When you receive an unexpected tax bill from the ATO after your tax return has been processed, it simply means that you still owe money to the Australian Taxation Office. In this case, it is likely that you have been paying your taxes incorrectly. The following could be the reasons behind your receiving a tax bill:
- A tax offset you were previously eligible for might no longer be available, like the low and middle-income tax offset (ended on June 30, 2022).
- As a sole trader, it’s crucial to ensure you’ve paid the correct amount of self-employment tax throughout the year to avoid potential issues.
- Not enough tax withheld throughout the income year could be due to factors such as moving into a higher tax bracket, having multiple jobs, incorrectly claiming the tax-free threshold for more than one job or being a recipient of Australian Government allowances and payments.
- If your family’s income undergoes changes during the year, be mindful of potential Medicare levy or Medicare levy surcharge obligations that may arise.
- Earning income from investments or assets, like dividends or rental income, can impact your tax liability.
- It’s important to review any disparities between the information in your tax return and the data pre-filled for you, as these variations may require clarification or correction.
- An increase in income may elevate the repayment threshold for study or training support loans, and failing to notify your employer about such loans could result in an unexpected tax bill.
- Alterations in the private health insurance rebate can also lead to unexpected tax bills.
- Going beyond the concessional contributions cap with your super fund can result in additional tax obligations.
- Engaging in sharing economy activities, such as ride-sharing or renting out assets, can contribute to unexpected tax bills.
What To Do If You Receive A Tax Bill
Receiving a tax bill can be daunting, but addressing it promptly is crucial. Ensure timely payment by the due date indicated on your Notice of Assessment.
Notice of Assessment or the NOA is the statement issued by the ATO that explains how your tax assessment is calculated.
When you encounter difficulties, act swiftly to manage your debt effectively. Explore the option of creating a personalized payment plan that aligns with your financial situation; this might be a viable solution if you’re eligible.
If the reasons behind your tax bill are unclear or you’re struggling with payment, consider reaching out to the ATO or consulting with your registered tax agent for guidance. You can reach out to Clear Tax Accountants to get insights on your tax matters. No matter your circumstances, remember that support is available.
Preventing A Tax Bill
The majority of the employees have tax payments made on their behalf throughout the income year through PAYG (pay as you go) withholding. Such amounts help employees meet their annual tax obligations.
But what if the income earned doesn’t have tax withheld or doesn’t have enough tax withheld? In that case, the following actions could help in preventing a tax bill:
- voluntary entry into PAYG instalments
- increasing tax withheld from payments
- making tax prepayments
Voluntary Entry Into PAYG Instalments
For those new to business or anticipating business and investment income over entry thresholds, voluntary entry into PAYG instalments is recommended. Conveniently arrange this through ATO online to streamline your tax responsibilities.
If your latest tax return indicates that your instalment income is above the entry threshold, the ATO will automatically enrol you in the PAYG instalments system. Rest assured, you’ll be notified when this occurs.
Increasing tax withheld from payments
You have the option to vary the rate or amount of tax withheld to ensure it aligns with your end-of-year tax liability. If needed, you can request your payers to increase the amount of tax withheld, giving you more control over your tax situation.
Depending on your circumstances, you may need either an upward or downward variation in withholding. This tailored approach helps you manage your tax obligations more effectively.
Making tax prepayments
Take charge of your tax by making prepayments at any time. These payments contribute towards your expected tax bill and are held by the ATO unless a refund is requested.
What If You Don’t Pay The ATO The Debt You Owe?
Now, what happens when you owe the ATO money and haven’t paid the debt yet?
When you do not pay your tax debt on time, GIC or general interest charges are automatically added to the amount you owe. In this way, the ATO debt will keep on increasing while it is unpaid.
The GIC is calculated daily on the outstanding amount, using compounding interest. This means that the interest not only accrues on the initial amount owed but also on the accumulated interest, gradually increasing the overall debt.
In specific situations, the ATO may consider reducing or cancelling the interest on your debt. However, before making such a decision, you’ll be required to provide a detailed explanation. This explanation should outline why, given your circumstances, it is fair and reasonable to have the interest reduced or entirely cancelled.
Owing taxes to the ATO can feel overwhelming, especially if you were expecting a tax refund. If you find yourself in this situation, there’s no need to panic. Consider these steps to navigate and manage your tax obligations effectively:
Reach out to tax experts who can provide valuable insights into your specific situation. They can guide you on the next steps and offer tailored advice to help you understand and address your tax challenges. You can contact Clear Tax Accountants today to get the solutions that fit your challenges perfectly.
You can also reach out to the Australian Taxation Office directly to establish a tax payment plan, along with rectifying the tax code.
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