ATO debt forgiveness

At Worrells, we naturally focus on the insolvency options for dealing with taxation debts.

However, there are other avenues available for those with tax debts to deal directly with the ATO.

Individuals: Release from payment (serious hardship)

Individuals and trustees of deceased estates can seek a release from paying certain eligible tax liabilities where paying the debt would cause serious hardship. This means that the tax debts are permanently removed.

Serious hardship means that making a payment would impair the individual’s ability to meet basic necessities for themselves and their dependants. This is a statutory, non-insolvency avenue under Div 340 of Sch 1 TAA 1953 and access by direct application to the ATO.

How it works:

• Eligibility & evidence: The individual must demonstrate serious hardship with recent documents covering their income, expenses, assets, and liabilities.

• Other Factors: The ATO will also consider other factors, including how the tax debt arose, whether funds were dispersed without providing for tax debts, and the individual’s compliance history.

• What can be released: Only specified eligible tax-related liabilities can be released, including income tax, Medicare levy, PAYG instalments, and FBT.

• What can’t be released: The ATO cannot release tax debts for GST, Superannuation Guarantee Charges, or director penalty notices.

• Other non-insolvency supports: Depending on circumstances, the ATO can defer lodgement/payment, adjust certain repayments (e.g., study/overseas levy), or prioritise processing—often alongside or instead of a release application.

 Companies: No Release Available

A similar process does not exist for companies. The ATO does not have the power to release a company from core tax debts, like it can for individuals suffering from hardship.

The following options are available for companies with a tax debt outside of formal insolvency processes:

• Apply to remit interest:  Where the company meets the criteria, the ATO may remit some or all interest levied on a tax debt. For interest, the ATO needs to be satisfied that the circumstances contributing to the delayed payment of tax debt are not the client's fault, and the client has taken reasonable steps to mitigate the circumstances, or it is fair and reasonable to remit.

• Apply to remit penalties: Where a company has received penalties from the ATO, the ATO may remit those penalties in certain circumstances. Usually, this means the company acted promptly to rectify the issue, the company has otherwise good compliance history, or the penalty level is disproportionate to the severity of the conduct.

• Decide not to pursue: The ATO can determine that a tax debt is uneconomical to pursue. This is an internal accounting decision that does not extinguish the legal liability, and it can be re-raised and pursued at a later date.

Summary

While there are options available to individuals and companies to seek to deal with their taxation debts directly with the ATO, the scope of these options is limited.

For individuals, the process is only available to those suffering severe hardship, and the debts that can be released are also limited.

For companies, no administrative process for release is available, however, companies can seek remission of interest and penalties on some debts in some circumstances.

This leaves insolvency options, including bankruptcy and Part X for individuals, and liquidation, voluntary administration, and small business restructuring, as key tools that allow individuals and companies to more flexibly deal with unsustainable tax debts.