Confused about what may happen if you fail to lodge your tax on time? There’s a lot of info around, some is classic fear-mongering and a lot of it jargon-ridden. We’ve tried to make it simple and honest – so you can make your own decision.
Do I need to lodge tax at all?
If you earned under $18,200 and didn’t pay any tax, it’s unlikely you need to lodge a return BUT you still need to lodge a ‘Nil Return’. (We do this for current clients free of charge). This will get the ATO (and us!) off your back and out of trouble.
Hint: How do you know if you’ve paid tax? If you are working it’s very likely you have it taken out regularly by your employer. Check out your payslip or ask!
The ATO lazy. Why don’t they just lodge a Nil Return for me?
Brilliant question and one we here all the time. The Aussie tax system is based on self-assessment. It’s up to you to tell the tax office you don’t need to lodge. But see what happens if you try to fool them into thinking you don’t need to lodge. See below.
Hint: if you earned under $18,200 and did pay tax you’d be crazy not to lodge as you will get it all back (unless you have government debts in which case they will remove them first – tough luck!)
You need to lodge when…
If you earned over $18,200 and did pay tax then you have to lodge – it’s the law. (Sometimes you may even need to lodge if you earn less but you’ll need to check with a Tax Agent to know for sure). You’ll almost always need to lodge every year and most people (individuals) do it between July and October as they are keen to get their hands on a refund (oh yeah). People who owe tax often leave it till later – which is ok but only for a short period and only if they are represented by a Tax Agent.
Does everyone lodge on time?
Heck no. In our experience, up to 30% of taxpayers don’t lodge on time. So, if you are late you are certainly not alone. As to be expected most people who are late owe tax and it may surprise you that almost 25% of all business enter into some sort of late payment arrangement with the ATO and many individuals also.
The $million$ question – what happens if I’m late?
Initially not much. And if you are due a refund then it’s unlikely the ATO will come after you anytime soon. But after a few years, it gets time-consuming and expensive to chase you up. Tax laws change every year. Not many people realise that you need to have the tax law applied to the year of your return. So if you need to do your 2014 tax return they you must do it according to the 2014 tax law – not today’s law.
The longer you leave it the more complicated the situation gets. Then the ATO start getting cranky and issuing nasty letters (which you ignore) and then fines (ouch).
Of course, if you owe them a tax debt, they get a lot even crankier earlier and your ability to ‘negotiate’ payment terms (see below) is restricted. The Tax Office particularly dislikes it if you don’t update your contact details and they can’t reach you or you don’t respond at all.
Are there ‘really’ late penalties and can I get prosecuted or audited?
Yep.
Firstly, the ATO will issue you a Failure To Lodge fine for up to $1100 depending on how late you are. If it’s paid soon after, then they will likely reverse the fine (but not always). Of course, this is just the start if you have a tax debt.
After a few years of trying to get you to lodge, the ATO can hit you with default assessments – that is they do your tax return ‘without you’ based on what they know about you (which these days is a lot).
Great. Saves you the effort right?
Wrong!
As the ATO won’t take your legal deductions into account it’s very likely you will get the worst outcome possible. Your expected refund can easily turn into a debt in these situations – all because you were too lazy to see a tax agent for an hour! You can appeal a default assessment, but don’t even think about it if you don’t have significant tax experience or things could get worse.
If you finally get your returns lodged then evidence suggests the ATO could penalise you further by auditing you (we did say they get cranky remember). This is a total pain in the ass and can be very expensive.
When am I most likely to get in trouble for not lodging?
That’s simple. When you ‘go missing’.
The Tax Office hates it when you put your head in the sand and hope they will go away. Sometimes they do. But only after they have sold your car or house or golf clubs. If you have no sellable assets then you’ll have your credit rating destroyed making it hard to buy a car or house or golf clubs. You get the picture.
Can I get away with never paying tax I owe
Yes, you can.
There are many people who duck the ATO for many years and eventually get away with it. Like any lender, if the tax office has little chance retrieving their debt, or it costs too much to do this then they will simply write it off.
Nevertheless, this only applies to people with no assets that the ATO could sell to recoup what’s owed, and generally, are not working much or at all any more (as the tax paid would be fully withheld year on year till the debt if paid)
And most importantly – best get applying for loans out of your head as there are few if any lenders these days willing to lend to anyone with an outstanding tax debt or without recent completed tax returns.
Can I reduce my tax debt in other ways?
Absolutely.
Firstly you could have a good Tax Agent review your situation and lodge an amendment or objection to a previous return or returns. There are a few tricky rules here but it’s altogether possible – especially if you’ve done your tax yourself or had poor advice (which happens a lot)
You can always enter a payment arrangement (previously mentioned) or if you do have assets you could borrow against them to reduce the debt.
Hint: We can assist with all the above.
Late returns – when are they too late.
The short answer is never.
But if you have late returns going back over 20 years things get tricky – not impossible – but you will absolutely have to talk to a tax agent who should have the correct software. In some cases, you will need to lodge a paper return (with an actual pen for gods sake), which can be time-consuming. On the upside, older tax returns can often mean big refunds! We’ve had clients with over 25 years of tax returns to lodge and have issued individual refunds over $100,000.
Final note. No BS.
If you have late returns and don’t want to lodge your tax you can absolutely get away with it – for a few years, usually, maybe.
Unless you owe tax then – you need to sort that out now.
But along the way, you not sorting your tax situation can reduce the quality of your life and put your financial security future in serious jeopardy.
Of course, you can always immigrate, flee the country or fake your own death. But that’s a topic for another blog.
Need help?
There’s so much more to tax than you think.
Oh, you also may find this excerpt from actual client notice interesting.
Stephen is the CEO of Accountants Direct and is a Professional Director, ASIC Agent, Startup Advisor & Investor & Capital Raising Specialist.
Contact Stephen or his team if you have any questions about this post or any business matter in general.
