What is Tax Debt and How Can You Avoid Accumulating It?

Tax debt is when you owe money to the government for taxes. This can happen for any number of reasons, and it’s not always your own fault. However, if you can’t afford to pay back your taxes to the government when the time comes, you might face tax debt. This rises over time, only creating a larger burden.

What exactly is this tax debt and when does it happen? More importantly, how can you avoid accumulating it? Many Australians find themselves unable to afford their tax debt, but luckily there are steps you can take to get your life back on track.

What Is Tax Debt?

As the name implies, tax debt is any money that you owe the Australian Taxation Office. Whether you didn’t pay enough throughout the year as a business owner or your employer failed to pay your taxes properly, there are a number of reasons why you might have incurred a tax debt.

While it’s often scary to owe the government money, there’s no reason to be alarmed. There are many systems in place if you’re currently experiencing hardship, as well as strategies for repaying this debt over time.

Each year, when you lodge your tax payment online through the ATO or through a tax professional, you’ll learn whether you have a tax bill. If that bill is for more than you can afford, you’ll need to pay this back as soon as possible. In this guide, we’ll share some of the ways to do that as well as alternative options if you’re unable to pay.

Reasons for Receiving a Tax Bill

There are a few reasons why you might receive a tax bill. It typically depends on your employment status, income, and any additional ways you make money. The most common reasons for getting a tax bill are:

  • Employee withholdings: If you’re a traditional employee, your taxes should be withheld from payments. However, sometimes not enough taxes are withheld, and this means you need to pay the difference.
  • Sole trader: If you’re self-employed or a sole trader and you don’t pay enough to ATO throughout the year, you will face a tax bill when it’s time to lodge.
  • Other income: Lastly, if you have any other source of income that’s untaxed like through a side hustle, you’ll owe taxes on this.

Why would the wrong amount be withheld if you’re an employee? This is usually caused by raising your tax bracket, like if you got a promotion. It can also happen if you incorrectly made multiple claims for the tax-free threshold.

What Happens If You Can’t Pay

If you can afford to pay the difference when you receive a tax bill, this is great news. You can pay your debt online through the ATO, and that’s the end of it. Be sure to consider how you’ll afford taxes in the upcoming season to make sure you don’t receive a tax bill again.

Otherwise, if you can’t pay, you still have options. In some situations, the ATO relieves some from their tax debt. This is known as ‘release’ and it’s only for those who are struggling financially to pay for necessities like:

  • Food
  • Housing
  • Clothing
  • Medical care
  • Education

You can apply for a debt release waiver as an individual or as a trustee of a deceased person. You can apply online, and your application will include information about your income, expenses, assets, and so on. Use the ATO’s Debt Release Tool to see if you qualify for this type of assistance.

If you don’t qualify for a release, you can still get the help you need. The most common option is a long-term payment arrangement. This means you and the ATO work together to find a payment situation that works for you. In many cases, they can waive fines, interest, and so on to make this more affordable.

The options are different for individuals and sole traders or small business owners. If you have business debt, you will need to determine a different option with the ATO. However, there are always lines of assistance for all types of tax debt.

Double-Check Your Taxes

If you feel there has been a mistake, you can always check your taxes yourself or with a tax professional. This is also true if you can’t come to an agreement with the ATO about your current tax debt.

While mistakes are rare, they do happen. If there’s a delay in processing your return or there has been an accounting error, this is something you can review with the Taxation Ombudsman. This is a free, independent service for helping with payment agreements and other tax debt alternatives.

How to Prevent a Tax Bill

The best strategy long-term is to prevent a tax bill in the first place. This can be done in a number of ways, and it’s all about pre-planning. Depending on your type of income and employment, you might need more complex tax planning to prevent a tax bill.

First, always keep track of your tax and financial records. If you do encounter an issue (like tax debt), you need clear records. While it’s unlikely, you might need to show records from previous years. Having clear documentation means never having to worry about ‘what ifs’ when tax season comes around.

Next, increase tax withheld from payments. If you didn’t estimate enough taxes previously, increase your withholdings for the next year. This means it will cover your full payment. You can do this through PAYG withholding. Additionally, if you’re a sole trader or self-employed, you can voluntarily give PAYG instalments.

How much taxes should you put aside? The best way to estimate is to use the ATO’s simple tax calculator. Alternatively, work with a tax professional to consider a number specific to your situation. Taking the time to create a long-term strategy for your taxes goes a long way.

Save on Your Taxes

Did you know it’s possible to make the most of tax season to avoid having a larger tax bill? Whether you’re working for a traditional employer or working from home for yourself, it’s important to know how to maximise your tax savings. Believe it or not, many Aussies pay more than they need to on their taxes.

What are some of the easiest ways to save money on your tax bill? While not everyone will be able to put their funds into investments like property or create property trusts, some tips are very accessible. Here’s how to minimise your tax bill (and maximise savings):

  • Capital gains: When you sell an asset (like a property, stock, etc.), any income you receive is treated as income Though you’ll owe taxes on these, they also qualify you for a tax income, meaning you save in the long run.
  • Trust: Creating a trust not only saves you during tax season, but it’s also a smart way to protect your savings.
  • Self-managed super fund (SMSF): Save on fees by taking advantage of a tax-effective self-managed super fund.
  • Super fund: Additionally, you can reduce your taxable income by putting more of your salary into a super fund. This is a smart way to prepare for the future while reducing your likelihood of tax debt.
  • Claim expenses: Last but not least, don’t be afraid to claim qualified expenses like car expenses, travel fees, and home office costs.

The biggest tip above is to take full advantage of your deductions for expenses. Things like using your mobile phone for work calls or driving for work can all be deducted. Claiming qualified costs when you lodge your taxes means more money in your pocket since you reduce your taxable income.

Remember,  you can even include your tax fees as a deduction! If you work with a tax professional or other accounting service to manage your finances, these fees are deductible as well. It pays to get the help you need.

Ultimately, the best way to save on your taxes is to pre-plan. The savvier you are about your expenses, income, and savings, the better equipped you’ll be to avoid tax debt in the first place. However, if you do find yourself with an unexpected bill, there’s no need to worry. There are plenty of options, so you can find what works best for you.

Understanding Tax Debt

As the saying goes, there are two things in life that are guaranteed: death and taxes. Though nobody looks forward to lodging their taxes during tax season, it doesn’t need to be stressful. Even if you have tax debt, there are many options to ease this burden. Whether you pay in a lump sum when you get your bill, apply for hardship relief, or make a payment plan, you’re on the right track.

Like all things when it comes to managing your money, it pays to be proactive not reactive. Contact a member of the Debt Buster team today on 1300 368 322 for help creating your own strategy for tax season. There’s no time like the present to start planning, so don’t let this year’s taxes come as a surprise.

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