Tax-related debts are sometimes ignored by those of us struggling with inflationary pressures and sky-high energy prices. However, this may not be the wisest course of action, since these disregarded debts are likely to continue to accumulate general interest charges.
Generally, the ATO won’t pursue a debt if it’s satisfied that the debt is uneconomic or irrecoverable at law. However, in certain instances, such as where a taxpayer has a significant history of non-compliance or where there are public interest considerations, the ATO may pursue a debt even though it is uneconomical.
A simpler way of dealing with a tax debt, particularly if you’re experiencing hardship, is to apply to the ATO to be released from it.
You can make a formal application and may be released from a tax debt if you’re experiencing “serious hardship”. For the ATO, this means judging that the payment of your tax liability would result in you being left without the means to afford basics such as food, clothing, medical supplies, accommodation or reasonable education.
To decide whether serious hardship exists, the ATO will use an income/outgoings test and an assets/liabilities test.
The income/outgoings test assesses your capacity to meet your tax liabilities from your current income, taking into account your household income and expenditure. The assets/liabilities test looks at what equity or assets you may have access to, as an indication of whether you can pay – for example, your residential property, motor vehicles, life insurance or annuity entitlements, collections, furniture and household goods, or tools of trade.
The ATO will also consider a range of other relevant factors, depending on your particular circumstances.