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Tax Debt: Why you can’t ignore it & what happens if you don’t pay it off

Most of us know all too well how deflating it is to work hard all week then have most of your pay disappear on groceries, rent, bills, & loan repayments. If you’ve done your Tax Return this year & have arrived on the lodgement page only to discover you red numbers in front of you, you’ve also got a Tax Debt to add to the list. It’s understandable that another hit to the wallet might be unwelcome, so whilst you might just want to turn off the computer & ignore it, it’s really important that you don’t.

Why can’t you ignore your Tax Debt

Two main reasons;

  1. You can be fined. (Making the bill even higher!) You can also be charged interest on your debt on top of these fines. More info on Failure to Lodge Penalty figures  HERE
  2. Not lodging your Tax Return is a criminal offence. This can lead to prosecution and conviction and can even result in being fined up to $11,000 or prison for up to 12 months! EEEK!
Tax Debt ATO Letters
If you don’t lodge your Tax Return, letters like this might be on their way in the mail ☹

What are your options if you have a Tax Debt

If you’ve got the money it’s simple – Pay it. This gets the ATO of your back and leaves you with that warm fuzzy feeling that the debt collectors won’t be knocking at the door.

If that’s not possible, no need to stress out. If you’re having trouble paying your Tax Debt in one hit, you can contact the ATO and organise a payment plan. You can then pay off you Tax Debt in instalments, leaving you with the same warm fuzzy feeling the red number is going down, not up!

How to avoid Tax Debt next year

Unfortunately, if you earn the same amount next year as you did this year, it’s likely you’re going to owe the ATO money again. However there are ways to take the sting out of it.

  1. Speak to your employer. If you’re and employee and you’re paying tax it’s likely that you have filled in your tax declaration incorrectly. Check to make sure that you have ticked the correct boxes on the tax declaration.
  2. Medicare Levy Surcharge might be causing the problem. Review whether you are paying the Medicare Levy Surcharge  and if you are, look into taking out private health insurance.  
  3. Put some money aside. Use last year’s income statement to see what your total income was. If you expect your income to be the same this year, it’s simple. Get the Tax Debt figure & divide it by 52 – then put that much money aside every week. Come tax time, you’ll have that money sitting there ready to go.
  4. Try to reduce your taxable Income. There are a number of ways you could potentially reduce the amount of tax you pay each year including claiming tax deductions, certain tax offsets, and/or choose to salary package (salary sacrifice) For more info on these, check out our blogs:

A Quick and Easy Guide to Tax Deductions in Australia | One Click Life

When do you start paying Tax? – One Click Life

If you’d like some more info on how it all works & what may have contributed to your Tax Debt, Read on!…

Taxable Income

The amount of Income Tax you pay depends on your income. More income = more tax. If you’re employed, whether it be full-time or part-time, your employer takes money from your pay & gives it to the ATO. When tax time comes around, once tax deductions have been applied to your payment summary, if you’ve paid too much tax, you get a Tax Refund. (Green numbers!) If you haven’t paid enough tax, you get a Tax Payable. (Red numbers ☹)

Now, you may ask “Why haven’t I paid enough tax, isn’t my boss supposed to be responsible for that?!” You employer is responsible for remitting tax to the ATO based on  the income you earn each pay cycle. But there are also other forms of income that you may not be considering such as contracting, bank interest, dividends and the list can go on!

What taxable income can contribute to a Tax Debt?

If you’re an Australian resident for tax purposes, the income you earn in Australia and overseas above the tax free threshold ($18,200) will be taxed, regardless of how you received it.

Some common forms of extra income include:

  • Wages
  • Centrelink payments
  • Jobseeker payments
  • Crypto
  • Shares
  • Investments

The tax you owe is calculated based on what tax bracket your combined income falls under. If during the year the ATO hasn’t received enough tax from you or your employer, you will owe them money. This crystalises once you lodge your tax return.

Resident tax rates 2021–22

Taxable incomeTax on this income
0 – $18,200Nil
$18,201 – $45,00019 cents for each $1 over $18,200
$45,001 – $120,000$5,092 plus 32.5 cents for each $1 over $45,000
$120,001 – $180,000$29,467 plus 37 cents for each $1 over $120,000
$180,001 and over$51,667 plus 45 cents for each $1 over $180,000

The above rates do not include the Medicare levy of 2%.
Individual income tax rates | Australian Taxation Office (ato.gov.au)

Click Here for more info on Tax Free Thresholds

If it’s all a bit too overwhelming or confusing, fear not!

At One Click Life, we are here for you! Our Numbers Geeks can have a look over your lodgement and see if there is anything we can do to reduce your Tax Debt or have a look over the figures to help you put a plan in place for next year. Remember, we charge for tax lodgements, but our advice is free when you lodge your tax through One Click Life!

Give a Numbers Geek a call on 1300 707 117 or email at hello@oneclicklife.com.au