The Australian Taxation Office (ATO) offers flexible payment plans to help you manage your debt without stalling your operations. Here is a breakdown of how these plans work, the pros and cons, and how to set one up effectively.
The Pros and Cons of a Payment Plan
Before committing, it’s important to understand the trade-offs of entering a formal arrangement with the ATO.
The Benefits:
- Accessibility: Most plans are incredibly easy to establish through online portals.
- Flexibility: You can choose a payment frequency that suits your cash flow: weekly, fortnightly, monthly, or via specific lump sums.
- Time to Breathe: The ATO generally allows these debts to be spread over a period of up to two years.
The Drawbacks:
- Interest Costs: While the plan gives you time, the ATO charges interest on the outstanding balance. Unlike many other business expenses, this interest is not tax-deductible.
- Refund Offsets: If you become entitled to a tax refund or credit while on a plan, the ATO will automatically apply that money toward your debt rather than sending it to your bank account.
How to Set Up Your Plan
You can initiate a request via the ATO’s online services or their 24-hour self-service phone lines (13 28 26 for individuals or 13 72 26 for businesses).
- The Initial Deposit: To activate the plan, you must make a minimum 5% upfront payment. If you pay manually, this is due within 7 days; if you set up a direct debit, you have 14 days.
- Calculate Your Installments: You will select your frequency and dollar amount. Using the “Calculate” tool on the ATO website will confirm if your proposed amounts will clear the debt within the mandatory two-year limit. If the tool flags it, you’ll need to increase your payments until it fits the timeframe.
Key Conditions to Keep in Mind
A payment plan isn’t a “set and forget” solution. There are strict rules to ensure the plan remains active:
- Stay Current: You must lodge and pay all future BAS or Installment Activity Statements (IAS) in full and on time.
- What if you can’t pay the next one? If a future bill is also unaffordable, you must call the ATO during business hours to renegotiate. Be prepared: they will likely ask detailed questions to assess your financial capacity and why a new plan is necessary.
- Credits Aren’t Payments: If a tax credit reduces your debt, that’s great—but it does not replace your next scheduled installment. You must still make your regular payment as agreed.
Pro-Tips for Long-Term Success
- Start Small: When setting up your plan, ensure the installment amount is sustainable. You need enough “breathing room” in your budget to pay for your current business taxes while paying off the old ones.
- The “Tax Tank” Method: One of the most effective ways to avoid BAS-shock is to open a separate bank account dedicated solely to tax. Transfer a percentage of every invoice you receive into this account immediately so the money is there when you need it.
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